We Study Billionaires - The Investor’s Podcast Network - Classic 14: One Up on Wall Street

Starting point is 00:00:00 You're listening to TIP. In today's classic episode, Preston Nye are reading Wandaub on Wall Street by Peter Lynch. Our episode was original published as episode 124 back in February 2017. If you don't know who Peter Lynch is, he gained his fame as the manager of the Magellan Fund from 1977 through 1990. During this time, he grew his fund from only $18 million to $14 billion, producing a 29.2% return each year for his ambassadors.

Starting point is 00:00:29 the best return any mutual fund ever recorded. One-up on Wall Street is perfect for the new investor because Linz is simple to understand and doesn't drown the reader in venture terminology. So without further ado, let's jump to it. We study billionaires and this is episode 124 of The Investors Podcast. Broadcasting from Bel Air Maryland, this is the Investors Podcast.

Starting point is 00:00:57 They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everybody doing out there? This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. Today we have a book for you, and this one is a very, very popular book that you'll find on Amazon.

Starting point is 00:01:28 If you look for anything, stock investing, I'm sure this will be one of the top. search results. And it is one up on Wall Street by Peter Lynch. And I'm surprised that we haven't done this book up until 121 episode stick, because this one here is a pretty famous book. For anybody that doesn't know who Peter Lynch is, Peter Lynch retired from his position as a manager at the Magellan Fund in 1990, after one of the most successful runs in stock market history. During his remarkable 13-year run, Lynch produced an annualized rate of return of 29.2% annually, beating the market by and large by about 13.4% per year while he was running this fund. So the Magellan Fund was one of the best performing mutual funds in the world between 1977 and 1990. And if you had invested $10,000 on the first day that Peter Lynch took over, then you would have sold that position whenever you left.

Starting point is 00:02:21 you would have had $280,000 just in that short amount of time. So the stuff that Peter Lynch knows to produce those kind of results is fairly profound. So this book won up on Wall Street, fantastic book. I have to tell you, so I read a Peter Lynch book probably 12, 15 years ago. It was actually one of the first investing books that I kind of dove into whenever I was first learning. And I read the hardback the first time. This time, I wanted to refresh myself on the book. So I downloaded the audible version and listened to the audible version.

Starting point is 00:02:55 And to be honest with you, I didn't really care for the audible book on this one because the abridged version was really short. I mean, it was almost like none of the content was even there. How long was it? Like two hours or something? Yeah, something like that. Yeah. I didn't really feel like it got the essence of the book very well.

Starting point is 00:03:13 I think it left out a lot of information. So as I was preparing, I grabbed my old copy of my Peter Lynch book. and I was taking some notes from there as we're going to discuss some of the stuff today. But if you're going to get the audible version, usually I'm a huge proponent of using audibles. This is one that I'd probably tell you to not buy the audible and go with the actual hard copy of the book. I also just want to put out there before we dig into the different chapters and different sections that is really a good book for beginners. And I think that's important also to understand. And like sometimes when we're saying, well, it might be a bit simplistic or not just because

Starting point is 00:03:51 we're only referring to the audible version here. But it's also because if you're really new to stock investing, this is probably one of the books that you should start reading. And it's very well written. It's very easy to understand and it's built step by step. So I'm a huge proponent of this type of teaching and writing style. So I think most people would, if they're new, if they have less than call a year of experience Stock investing, I think this book would be good to pick up.

Starting point is 00:04:17 Yeah, I totally agree with that. His writing style is very easy and fun to read. So this is what I'll tell you about this book, that I think anytime you talk to somebody about Peter Lynch, they're going to say this phrase. They're going to say, oh, yeah, his big thing is that you invest in what you know and that you kind of go to the mall. And if you see a company that you like, call it, like right now, let's say you go to a restaurant like Chipotle and you like Chipotle that you should invest in that company.

Starting point is 00:04:42 That's what a lot of people will summarize with his books. And what I did before we started recording this is I did a little research on what Peter Lynch is doing today because you don't really hear about Peter Lynch anymore. It's just like he disappeared from the face of the earth. This was a really interesting article that came out in the Wall Street Journal just a year ago. I'm going to start to read some of the parts from this. So Peter Lynch, 25 years later, it's not just invest in what you know is the title of the article. article. So Peter Lynch wants you to know that his ideas are being misquoted widely. And this is what Peter Lynch says. I've never said if you go to a mall, see a Starbucks and say it's good

Starting point is 00:05:25 coffee. You should call Fidelity brokerage and buy the stock. So now to the article. Following the market still at age 71, he instead explains his philosophy this way. Use your specialized knowledge to home in on stocks you can analyze, study them, and then decide if they're worth owning. The best way to invest is to look at companies competing in the field where you work. Someone with a deep restaurant industry experience would have predicted the success of Panera Bread or Chipotle. He says, if you're in the steel industry and it ever turned around, you would see it before I do.

Starting point is 00:06:02 What's wrong with the popular wisdom version of his ideology, which is usually cited as invest in what you know, it leaves out the wrong. of serious fundamental stock research. People buying stock in something that they know nothing about, he says, is the same thing as gambling. It's not good. So I think that that's a really important article to highlight before we start talking about this book because there's a lot of people out there.

Starting point is 00:06:27 So just go out and buy a company that you feel good about or that you know or that you frequently go to and really like the way that the business is run. That's not what Peter Lynch is saying. He's saying that that's a starting point. And then whenever you find that company that you think might be a great business, you go and look at the fundamentals. You go look at the income statement, the balance sheet. You then look at the cash flows.

Starting point is 00:06:50 You then look at how much the earnings are growing. And then you figure out what is an appropriate price to pay for owning that kind of business. That's what Peter Lynch is saying. And a thing is also a question about like everything else here in the world, and especially in financial literature, is also a question. question about simplifying things. So it has really been simplified, but I do want to say that one on Wall Street, the tagline here is how to use what you already know to make money in the market. And if you read Pillar Lynch's own description of the book, and it might have been for

Starting point is 00:07:24 marketing purposes, he's basically saying some of the same things as like what he was critiquing before with a Preston Red. So, for instance, in the very first chapter, he talks about, well, a lot of people could probably have seen by going to the mall and drinking coffee at dunking donuts and he actually puts himself in the shoes of that person with all the many stores popping up that it might be a good stock pick. So I kind of think that it's true that you can probably say that it is not that simple, but I also think that now that we're transitioning to the book, that that's also one of the basic premises of the book. Expertise and familiarity is definitely not the same. And we'll be talking more about that as we go through the book.

Starting point is 00:08:10 All right. So the way we're going to discuss the book today is there's three different main sections that we're going to cover. The first section is preparing to invest. So Stig's going to highlight a couple of things here with this. So one of the first things that Peter Lynch talks about in this section is that professional needs to follow rules and amateur doesn't. And this is actually a big advantage for amateurs. So let's talk about some of the constraints that professionals have. They can't necessarily buy what they like. And the thing is that most institutional investors, they buy big brand names. They're doing impartly because they have so much money that they need to employ. They can only buy, call it S&P 500. That's one reason. But also because being

Starting point is 00:08:52 in asset management is also about not looking bad. And it's really, really easy to look bad if you're buying, for instance, small cap stocks. And he's actually talking about this saying, apparently that was going on in the 90s on Wall Street saying you can never get fired buying IBM. And I just thought that was a really fun quote. I mean, this is true, though. This is something that you see on the professional side that so many of these guys just take this safe path that if they're wrong, but all their buddies are wrong as well, then it doesn't look nearly as bad. But if you go out and you do something that's just really off the beaten path and it fails, I mean, you're going to get slaughtered. in this business. So that's a really interesting highlight.

Starting point is 00:09:37 One thing that he says to cope with that as an amateur investor is to buy small cap stocks. And I think it's really interesting approach that he's having. And I think it's both correct and also think it's wrong. So I think it's correct in the sense that you can definitely find many small cap stocks that might be interesting. They are not really analyzed by analysts. So like you can find a lot of great value. But another thing is that we just talked to you too about before that the way that this book is created is created as a beginner's book, like, how do you find your first stock? And I would say that the worst thing you can probably do trying to pick your first stock is probably to find a small-cap business. So I kind of feel

Starting point is 00:10:19 that counterintuitive. Well, so expound on that stick. Tell us why you think that that's bad. Well, there are actually multiple reasons. One reason is that small-cap stocks, there are less information out there. Another thing is that smaller companies tend to be more volatile. And if you haven't tried to invest before, you don't necessarily know what happens when your stock lose just say 5 or 10 percent. And you definitely don't know what you're going to do if that stock drops call it 50 percent. And one more thing which is really an investor bias is that people usually invest too much in a single stock the first time that they're investing. I can definitely testify to that. I think it will probably not be uncommon for someone to invest as much as 20% in

Starting point is 00:11:03 just one stock. And that might be okay if you were on Buffett. But if you're a new investor, this is the first stock you find this great small cap company because you read this book, invested 20% in that, I think it can be really dangerous for you to do so. Yeah, I want to add a comment to this as well as far as I think that something that I think a lot of people need to think about is when you get into some of these smaller companies, they don't nearly have as much of a competitive advantage, an enduring competitive advantage as some of the mid or large cap companies. That can be eroded rapidly, especially if you're in a company that's a tech company

Starting point is 00:11:40 that's moving pretty fast pace. Somebody could come along and just quickly erode whatever competitive advantage that the company has. And that's something that I think a lot of new investors aren't thinking about and don't necessarily understand the ramifications of how badly that could destroy the price that you paid in a really fast and rapid way. And another thing, and clearly this might also be case for the bigger companies, but smaller companies typically don't have the same credit ratings,

Starting point is 00:12:08 which means that they are more vulnerable, for instance, to interest rates, risks. So there's a lot of things that you might not be able to see when you just read through the financial statements, but as you get more experience and you actually get to work with a lot of stocks, a lot of these things would appear more logic to you. So definitely not start up with small companies. This is how I'd like to summarize the small cap part is, yes, there's more opportunity in small cap because you don't have the big players kind of necessarily operating down in them because

Starting point is 00:12:36 they've got to move much larger sums of money. So there's potential opportunities there in the value. But it's kind of harder to play in that space if you don't know what in the world you're doing. So that's how I'd kind of balance the argument is, yeah, you could have some upside there, but you really got to know what you're doing. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering

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Starting point is 00:17:15 But that's actually not true either. Because the interesting thing is that the big institutional funds can actually just pick and choose among the S&P 500. They're actually restricted in a lot of ways. So some of them might be restricted in terms of waiting in terms of the market capitalization. So in other words, even though that some of the smaller, bigger companies might seem appealing, they might not be able to invest more than that. Another thing is, even if they have the freedom to do so, they might not be allowed to say have more than 1 or 2% in any of the S&P 500 stock. So even though they might seem like, oh, we're heavily tilted into a small SNP 500 stock.

Starting point is 00:17:52 That's only way we call it 0.05%. They're still constrained in many ways. So basically my point is that SNP 500 is not, as it might appear, a more efficient index just because they're big and just because everyone has access to the information. Everyone, even the big players and especially the big players, are constrained a lot. So there is a lot of efficiency in that index as well. I know that clearly Peter Lynch couldn't include everything in the first few chapters, but I think that's something that's extremely important for anyone starting to invest in both indexes and individual stock picks. So one final thing that I want to add to this section that I really like about Peter Lynch's

Starting point is 00:18:33 writing is he says that stock picking is both an art and a science. And we've mentioned this on the show before, but I really like how he spells this out. he says that too much of either is a dangerous thing. A person infatuated with measurement who has his head stuck in the sands of the balance sheet is not likely to succeed. And if you could tell the future from a balance sheet, then the mathematicians and accountants would be the richest people in the world by now. And what he's really getting at here.

Starting point is 00:19:02 And this is what I like about his writing style. And in the book, the way he writes it, he talks about this qualitative feel of going out and walking through, testing out these different companies that he had personal experiences with that kind of gave him a tip off. But then he does get into the math and he talks about different multiples that he finds are appropriate to pay. And at what times in cyclical stocks versus financial stocks or whatever, he gets into that. And he talks about being originally tipped off through a qualitative means and then he backed it up with quantitative research. All right. So now we're into the meat of the book. We're going to go into the second part and

Starting point is 00:19:37 this is called picking winners, which I'm sure everyone wants to hear about. So let's talk about this section. I thoroughly enjoyed this section. And for me, this was the most interesting section. Also because he introduced the concept of a 10 bagger. And for anyone that's not familiar with the term 10 bagger, that means that you will invest in a stock that you'll get 10x on, basically. And so he guides people in terms of how do you find these companies, which is a very interesting discussion. One of the things that I would like to highlight here and also goes hand in hand with some of the things that Preston talked about in the introduction is that he's basically saying here literally that the best place to look is close to home. And his thesis here is that where you

Starting point is 00:20:20 are an expert, you can probably make the best qualitative analysis. And I completely agree with that. I just think that it's very important that you don't confuse familiarity with expertise. And I just want to come up with an example here. If people are thinking about, hmm, who are the best person to value my home? Who's the best person to do that? I think a lot of them would say, that's probably myself. Now, so there have been a lot of studies about this, and it actually turns out that the worst person you can think of to value your own home,

Starting point is 00:20:56 that's yourself. because you have so much bias every time you're looking at your own home. That is very, very difficult for you to do so. And I think this really underlines the difference between expertise, which is actually what Peter Lynch is talking about and then familiarity. He's basically saying here, if you're familiar with a product that you really like, then that is your cue to start your analysis. It's not your cue to actually invest in that company.

Starting point is 00:21:24 So I think that's a good point. And in continuation of this, he comes up with this example. He's saying that he realized the huge success of Pampers. And he was saying that, okay, so I saw everyone buying Pampers. It was a great product. It has a wide mode. Should you buy that stock? Well, actually, Pampers was not really a stock because it was owned by Procterang Gamble.

Starting point is 00:21:47 And if you looked at, even though it was a huge success, it was still less than 1% of the revenue of that company. So you probably shouldn't go in and buy that, at least not for that argument. It's the same thing you see here with Nintendo right now. And with all those... The Pokemon Go? Is it what you're saying? Pokemon Go, yes. Thank you, Preston.

Starting point is 00:22:06 You clearly have young cats. No, I saw you look up and I was like, he can't remember the name of it. Exactly. It's the same thing. Because Nintendo had like soaring stock price whenever his Pokemon Goals came out. And they were like literally making no money of that product at that time, which was a lot of fun. So I just think that's another example of if you have a really good story, it's not the same as you actually have a huge potential for monetizing it.

Starting point is 00:22:31 So I guess my thing I want to ask you, how many times have you seen a person that you just get in a random conversation and the person says, oh my, I got to go out and buy, you know, like your example, Nintendo. This Pokemon Go thing, everybody in the world is playing it. And like that was literally their start and the, end of their analysis for buying a company. And that was it. Like, there was nothing else discussed. Not only did they not look at the earnings and all the other pieces that would drive a potential price that you would pay, but they're not talking about that second point either of like, okay, so that's one product in the whole product mix of the company that might make up,

Starting point is 00:23:17 like your diaper example, less than 1% of the total revenues of the company. And the person literally just purchased the stock around that one idea that had less than 1% of the overall revenue. I guess for me, I've talked to enough people through the years to learn that most people are not big picture thinkers. And I think that when you see a guy like Peter Lynch, these guys can start with this really big idea. Like, hey, this might be a great company.

Starting point is 00:23:46 Then when they go and they assess the company, they start with the big picture. Okay. So how much money is this company bringing in? a year. Okay, they're making $100 million. Okay, they're making $100 million. The product that I was first introduced to that kind of gave me the idea of looking at this company only makes up 10% of the revenue. So that's $10 million of the $100 million that they're bringing in. The margin on that thing that I'm looking at is 3%. So how much am I willing to pay for, you know, like they're picking it apart from big picture to small picture. And they're then saying, well, how much is

Starting point is 00:24:21 that worth to me to pay to own that in a per share basis? And then they're making a very intelligent and thoughtful decision to own it or not own it. And I think another argument consideration of this person is that Peter Lynch in this section go through the traits of a really good stock. And like Warren Buffett, and I think we probably mentioned this a few times on the podcast, he's saying that the simpler, the better. And I don't want to brand myself as a big Nintendo Pokemon fan. It's not what I'm saying. But I'm just thinking something like that computer game, I guess you would need to reinvent yourself in a year, too. I don't know how long the computer gaming cycle is, but it's something to consider compared to say the Dunkin Donuts example

Starting point is 00:25:06 he came up with. I mean, Dunkin Donuts, it's in a convenient location, at least according to Pillar Linz, they make great coffee. I mean, they don't need to reinvent how to make a good cup of coffee. They don't need to reinvent a good donut. It's just not how that works. And it's something that you would do every day. It's something that drinking coffee had done for so many years and would continue to do for so many years. I'm not saying Nintendo is a bad company. I'm just saying that they probably need to come up with a new computer game.

Starting point is 00:25:34 Continue the success, basically. And this actually also takes me to the list of some of the traits of the perfect stock, which I found really funny and interesting. The first one was actually a boring name. I found that discussion pretty funny. I think there actually also been studies about that, that if you have a really boring name, because people don't want to tell them that they own boring stocks. They usually do good, the boring stocks.

Starting point is 00:25:57 Spin-offs, that's typically also something that's doing well. So on this idea, I want to read something. The greatest companies in lousy industry share certain characteristics. They are low-cost operators and penny-pinchers in executive suites. They avoid going into debt. They reject the corporate caste system. Their workers are well paid and have a stake in the company's future. They grow fast and faster than many companies in the fashionable fast growth industries.

Starting point is 00:26:26 Pompous boardrooms, overblown executive salaries, demoralized rank and file, executive indebtedness, and mediocre performance go hand in hand. This also works in reversed. Modest boardrooms, reasonable executive salaries, and a motivated rank and file. And small debts equals superior performance most of the time. And he really says a lot of the ideas that we see the Warren Buffets of the world and other really successful business owners and investors say as almost a common thread through all these books.

Starting point is 00:27:02 So I wanted to throw that one in there because it totally relates to what Stig's getting at here. Another interesting trait that Pellinz is talking about is he's looking at no growth industries. And I'll simply love this concept because every time you hear like a stock pitch or you read an analysis, you would be like, oh, this nanotechnology is growing by 50% or 3D printers are growing by 200% a year or whatever it is. And he's saying that that is not where he's looking. He is looking at the industries where there are no disruptors. Because when there's no disruptors, there are very little competition, and you have fewer expenses, basically, and you have higher margins. I just want to come up with one example. This was actually a type of investment

Starting point is 00:27:51 I was looking into months ago that didn't pay not for one reason or the other, but the concept is still the same. I was looking at a landfill, and you might be thinking, a landfill, that sounds like the most boring thing they ever heard about. But the thesis about this landfill out in the area in North America was that it has a lot of pricing power, it has a lot of monopoly power, because who is going to build a landfill right next to a landfill? It really doesn't make any sense. Another thing is that if you have the chance to drive called 50 miles, 100 miles to the landfill, is actually, even though you can find a cheaper landfill called 500 miles away, it's still going

Starting point is 00:28:34 to be very expensive for you because you have to pay for the gas to get there. So you have a lot of pricing power in that area because you have monopoly power. And believe me, there are no disruptors in this industry. If you have a landfill in the middle of a rural area, it's really, really hard to compete with that company. So I'm not saying that everyone should go out and buy a landfill. That's definitely what I'm saying. But I'm saying that's the way that Peter Lynch is thinking about it. And I just wanted to bring up that example so perhaps everyone could get a better grasp of what he might have meant.

Starting point is 00:29:08 buy that. So if you feel like you're ready to fall asleep because maybe you're talking about landfills or whatever, that's with a boring name, Preston. Could you come up with an interesting name for the landfill? No, right? It's bad and bad. If you're ready to fall asleep talking about the pick, you're probably starting in the right location. So now we talked about some trades of the perfect stocks. And he also has some interesting trades in terms of the stocks to avoid. So one thing is that you should always dig into the financial statements and see how they make the revenue and how that's divided into the different customers. And he's saying that he has a strict color of point with 25%. I mean, basically he doesn't want one customer to have more than 10%, but if it's more than 25%, it's usually a big no-no. And I think you see that with a lot of companies, especially those companies that are heavily tied into the public sector.

Starting point is 00:30:01 And you might think, well, it's public sector, it's stable, but guess what, whenever there are new legislation and the public sector might be 80% of your revenue, like we've seen multiple exemplars of this who are just heading for big trouble. And I think that was a really good example that he came up with. And basically, I think that it's very clear whenever you're reading the book that Peter Lynch's foundation is really into value investing. Even though he talks a lot about 10 baggers and he talks about growth stocks. He is really, like, it's a very core value investor. And he also has a really interesting section about hot stocks and new issues and why you should avoid that. So I think when you hear the term 10 bagger, it's not necessarily how do I find the

Starting point is 00:30:46 next Silicon Valley startup. That's definitely not what he's saying. He's actually saying you can get 10x, but if you buy undervalued, great companies. Let's take a quick break and hear from today sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, Vanta gives you continuous automation

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Starting point is 00:34:03 Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. to kind of piggyback on that comment stick because the thing that I find interesting about Peter Lynch is he will buy a growth company or what we would refer to as a growth company, but he will buy it at the right price. That's an appropriate premium to pay for the growth that's occurring. So I want to read a short section here. Any growth stock that sells for 40 times

Starting point is 00:34:41 its earnings for the upcoming year is dangerously high priced and in most cases extravagant. As a rule of thumb, a stock should sell at or below its growth rate. That is, the rate at which it increases its earnings every year. Even the fastest growing companies can rarely achieve more than a 25% growth rate, and a 40% growth rate is a rarity. At the time I was researching this company, the PE ratio of the entire S&P 500 was 23, and Coca-Cola had a PE of 30. So you can obviously tell this was written a long time ago. If it came down to a choice between owning Coca-Cola, a 15% grower selling it 30 times earnings, and the body shop, a 30% grower selling at 40 times earning, I would actually prefer the latter. And the reason that he would prefer the latter is because there's

Starting point is 00:35:33 less of a margin between the growth rate of the body shop and the premium that was being paid at 40 times earnings. So I really like this example because he's getting into, he's talking about growth picks for people out there that are growth investors. Stig and I really aren't. But for people that are and are interested in some of these ideas, I think the key point here is if you are going to pay for a premium, that thing better be growing like crazy in order to actually justify that expensive price that you're paying. And I think that that's a really great highlight that he puts in his book. All right. So the final section we're going to cover is called The Long-Term View. And this is some other great conversations for anybody.

Starting point is 00:36:13 that's just trying to get a good foundation for their investing approach. In this section, there's a really fun chapter that's called the 12 silliest and most dangerous things people say about stock prices. So we're just going to throw a couple of these out here and maybe add some commentary to some of his comments. So one that I really liked is if it's gone down this much already, it can't go much lower. And boy, I'll tell you, I've hung on to some picks that have taught me that lesson. A lot of times over. So if you ever hear that phrase or you catch yourself saying that phrase, try to remember this from Peter Lynch's book because it's a doozy.

Starting point is 00:36:53 And whether it's high or lower is all about understanding why is it going high, why is it going low, and what is the price compared to the value? And I think another argument here is that if you had invested in Peter Lynch's fund with the day he took over, as we talked about in the very beginning of this episode, your $10,000 would have turned into $280,000. So a way to be thinking about this is that, well, I should probably hold on to this mutual fund for 13 years because my initial investment was $10,000.

Starting point is 00:37:22 Well, you can look at it like that, but remember, you also took a conscious decision to stay in that mutual fund whenever that $10,000 turned into $50,000 or whenever it turned into $100,000 and so on. And the thing is a really interesting perception to have because it actually goes the same way as if you're looking at a stock that can't fall in you further. And you're like, well, this stock used to be 10 bucks, but now it's $1.

Starting point is 00:37:47 I'm only risking $1 per stock. But I mean, if you're buying $10,000 and you're buying $10,000 stocks, it's the same thing. And I know for myself that it's very easy to get anchored on a stock price and not so much on your position. For how many times I've heard people say, well, you know, it's a really cheap stock. I can buy more shares because it's a cheap stock. I have heard that so many times from people to the point where I don't even want to say anything because I feel like I'm going to like hurt feelings or something like that with some people. But I think as a person becomes more educated in investing and they hear that,

Starting point is 00:38:25 it really tells you how little the person really understands what they're doing because whether a stock's 50 cents or like Berkshire Hathaway, $200,000 a share, there is no difference in the fundamental assets that are beneath or that represent that share of ownership in the equity. So I know we're poking a little bit of fun, but it is serious. I would argue that a majority of people actually believe that and don't understand that how wrong that statement is. And that's one of the points that Peter Lynch has here. The quote he has is, it's only $3 a share. What can I lose is the way he has it phrased?

Starting point is 00:39:06 Oh, I like this one because you hear this one a lot too. When it rebounds to $10, I'll sell. And, you know, like the person's already convinced themselves from a psychological standpoint that they're selling when it gets the 10. There's really no reason why they're selling when it gets the 10 other than it got to 10, which was a nice round number. Again, they're not digging into the fundamentals behind what represents $10 a share. Why would you sell when the market cap hits that? Is there something that's, has it hit a P.E. of 40 times earnings? Well, if that's your reasoning, then maybe that makes some sense. But if there's no analysis behind why you came up with that

Starting point is 00:39:46 figure that's kind of tied to a return, a percent of a return compared to where the market's at, I would argue you're making some really bad decisions on the way that you're buying and selling. Yeah, and it really comes back to the financial behavior that you have in terms of anchoring. And at least that's what they call it anchoring. So if you bought a stock, call it $10, you know, that is the average price or that is like the anchor price you have in your head. And you don't necessarily think about, as Preston said, what has really happened? Why is it not $10 anymore?

Starting point is 00:40:19 So that's why it's so easy to say, okay, when it rebounds to call it $10 or whatever price I bought it for, if that's the case, then I'll sell. And then we just tend to forget the opportunity cost that I'm. involved with this, that you can probably invest in something that you might get a better return off, but it's just, it's like we put everything into small mental boxes. And it's really hard to say stock ABC was a really bad investment because I lost money. It's better to say, I broke even though that you haven't broke even because it took your 10 years to break even or whatever, how long it took. So I want to put this in context. So let's say that in your local town, there's a hardware store

Starting point is 00:40:56 that you want to buy. And let's say you have enough money to just buy it outright. And the hardware store makes $100,000 a year after all the employees are paid, that's how much money you would be able to keep as the owner. So a reasonable price to maybe buy would be a million bucks because you get a 10% return on your money. So when you say that a stock, I'm going to sell it when it gets to $10. That'd be like buying this million dollar hardware store. And then some random person comes into your store and says, I'd like to buy your store for

Starting point is 00:41:27 $1.1 million. dollars and you had told yourself in advance if somebody comes along and offers me one point one million dollars i'm selling it there's no analysis behind why you'd be willing to sell at one point one other than you told yourself you would sell at one point one maybe your earnings are in a hundred thousand dollars anymore maybe your earnings are 200,000 dollars which means you might be able to sell it for two million dollars that's how you need to think when you're looking at one share of stock is what's the earnings? What did the earnings just go up to as the price went up? Maybe I can even make more money because the market's undervaluing it at $10. That's how a person needs to think they

Starting point is 00:42:06 always need to look at the profit versus the price versus the risk that's associated with it and treat it as if it's an entire business. One share is the same thing as an entire business. And that is so fundamental to be successful in the markets is to always look at things that way. All right. So that concludes our comments for the book. We really like this book, and there's so much more that we could cover. Peter Lynch is a fantastic writer. He keeps it qualitative and quantitative at the same time, and it's entertaining, which is a rarity when you get into investing books. So if you're a new investor, you're really trying to understand things and you're just starting out, I would tell you, go out and get one of his books and read it. You'll really enjoy it. There's beating the

Starting point is 00:42:46 street, and then there's also one up on Wall Street, and both are really great books. So at this point in the show, we're going to take a question from the audience, and this question comes from Jordan Lee Smith. Hi there, Preston and Stig. Jordan Lee here, speaking from Birmingham, United Kingdom. Warren Buffett has said many times that when he was in his early days as an investor, he would bind to companies and stocks that were fair companies at wonderful prices or cigar butts, as he calls them.

Starting point is 00:43:13 However, today, he now establishes that this approach was bad, and he said invests in wonderful companies at fair prices. And my question is, foreign investor starts. starting today, would it still be wise to follow Buffett's old methods of buying into smaller, less good companies, selling below net asset value, for instance, as although Buffett has said that this was a bad method, it did seamlessly raise him a lot of capital that he uses today. Or should the investor stick with today's value investing methods of wonderful companies at fair modest prices?

Starting point is 00:43:43 Thank you very much, guys, for all your hard work and educating the community. I hope to hear from you soon. All right, Jordan Lee, fantastic question. This really kind of gets at the heart of what our good friend Toby Carlisle is all about. So Toby wrote a book called Deep Value and it really implements this net net strategy where you go into the balance sheet. You find a company that has strong earnings that's being sold at a very steep discount. But the difference between what Toby's doing and what Toby's recommending and what Warren Buffett is doing is that Toby is consolidating picks across 20 to 30 companies that have been filtered down to give him those results. And his analysis in his book talks a lot about mean reversion and that these companies have been penalized so severely and been just punished that they have such a large amount of price action to move within just a short of.

Starting point is 00:44:43 amount of time, call it one year to a year and a half, that they can recuperate to a normalized price to earnings ratio, and that you can take advantage of this. If you do it in a batch, if you do this across the portfolio of companies that are all similar in the way that they're valued, not similar in the way that they're performing in the same sector or anything. So Buffett got away from this approach, and he went into a much more qualitative approach where, as you said, he's trying to find a great company at a fair price. And he morphed away from this deep value approach. And he really started placing a lot of emphasis on companies that have this enduring competitive

Starting point is 00:45:22 advantage and that don't have a lot of tangible assets. But he's doing it more in a manner that he's handpicking a specific company. Now, the reason I think that he had to transition, and this is just my personal opinion, I think some of it had to do with his experience with Berkshire Hathaway early on. I think that drastically shaped the way that he saw things because he saw these people in the town that were all up in arms. And he was the Grim Reaper who was going to kill the business and liquidate it and make a profit on the sale of all the assets. And as he went through that, that was a life-changing event for him. And then Charlie Munger said, you know, you need the value of the company as if it's living and not that it's getting ready to die tomorrow.

Starting point is 00:46:03 That changed him. And then I think something else that has a big impact on him is the amount of capital. capital that he has to move. He has to look for companies that are better alive than dead, if you will. And I think that that's another reason why he drifted into a different direction. But for the person who has a much smaller amount of money that can filter results based off of what Toby would call the enterprise value, I think that that approach is very useful. And I think that it can provide just amazing returns for people that are implementing. And I'm a huge proponent and advocate of what Toby's book talks about and what it recommends.

Starting point is 00:46:45 I think this is a really good question too, and also think it's a very complex question, because it really depends on one's skill set. And I want this to come up the right way, because this is not me saying there are only so and so many people that are smart enough to do this. Not everyone can do it. But I think it's really difficult to do. And since you're specifically talking about when you're just starting out, I'm not necessarily sure that what we call special situations is the right way to begin, even though that was how Warren Buffett began. I think a lot of reasons to this. As Preston also stressed, you can, even as a beginner, I guess, or at least with a little experience, do something like Toby because it's all automated and you are

Starting point is 00:47:30 diversified. I think it's really, really hard if you're going into this special situations or net nets, if you are picking individual stocks and perhaps putting more than 5% in one pick, because it tends to be very complex. And it tends to be complex for a lot of reasons. One reason is that you will be looking at a lot of catalyst, and yes, very often you'll see value being catalyst in itself. But for a lot of these companies that are highly undervalue or really small companies sometimes with a lot of debt even, it's not always that easy.

Starting point is 00:48:05 you might be waiting for that catalyst that someone will come and liquidate that company. Now, the thing is that as a small investor, even though you bought it at a really good price, you don't have the authority to go in and liquidate that. You might need an activist investor. An example of that could be Kyle Icon to go in and actually liquidate that company for you or to unlock someone that shareholder value. If you're a minority shareholder, you're usually not in that position to do that. So you might be faced with a high opportunity cost if you do that.

Starting point is 00:48:33 So it's definitely not something I don't think people should let into. I think it's very, very interesting. I just think that diversification, especially in these special situations, are very important. All right, Jordan Lee, thank you so much for this fantastic question. For sending this in, we're going to give you two awesome things. The first thing that we're going to give you is a free subscription to our ETF video-based course. The second thing that we're going to give you is a nice thing that we're going to give you is a nice thing that we're Another free subscription to Stiggs the Intelligent Investor Video course that we have on our website.

Starting point is 00:49:09 So two free subscriptions for you, and this is on our TIP Academy website. So anybody who's interested in learning more about these courses, go to our TIP Academy, which you'll see in our navigation bar on our website. And that's all at theinvestorspodcast.com. So if a person wants to record a question, just like Jordan Lee, and get it played on our show and get these free subscriptions to our courses, go to AsktheInvesters.com, and you can record your question and potentially get it played on our show. Okay, guys, that was all that we have for this week's episode.

Starting point is 00:49:39 We'll see each other again next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book.

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We Study Billionaires - The Investor’s Podcast Network - Classic 14: One Up on Wall Street

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