The DIY Investing Podcast

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

Books Referenced: Fooled by Randomness by Nassim Taleb *If you purchase through this affiliate link, I will receive a small commission, at no additional cost to you. Your purchase will be supporting the show's continued production of free content. Thank you for your support! Mental Models discussed in this podcast: A priori knowledge Deductive vs Inductive Reasoning Empirical Evidence The Scientific Method Curve Fitting and Extrapolation Problem Boundary Conditions Hindsight Bias Ergodicity Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode86 Why Backtests are harmful and counterproductive Empirical Evidence - backtesting is a form of empirical evidence. I.e. observation of the past A priori knowledge - knowledge, justifications, or arguments that exist independently from experience. (Ex: Mathematics) (Wikipedia) a form of knowledge that can be derived by reason alone. Deductive reasoning - the process of reasoning from one or more statements to reach a logically certain conclusion. (Wikipedia) Inductive reasoning: "inductive reasoning as the derivation of general principles from specific observations (arguing from specific to general)" - Wikipedia (same link as below) "While the conclusion of a deductive argument is certain, the truth of the conclusion of an inductive argument is probable, based upon the evidence given." -Wikipedia Scientific Method: Form a hypothesis Propose an experiment to test that hypothesis. Results of the experiment either support or disprove the hypothesis. No experiment can prove a hypothesis. The problem with the theory: A theory only follows the scientific method if it can be disproven. If a theory is unable to be disproven, then it is not a true scientific theory but something else. Curve Fitting and Extrapolation problem (using a curve or model beyond the range of observed data is subject to uncertainty) Boundary conditions. G Merani (Twitter) (Website) - Covers net-net study backtests in depth Summary: Investors use backtests in order to test whether a portfolio's asset allocation would have performed well in the past. The use of backtesting is harmful to a portfolio because it ignores uncertainty and overstates the value of empirical evidence. It is much better to reason from first principles using deductive reasoning. This deductive reasoning is better than inductive reasoning for investors because it eliminates hindsight bias.

Mental Models discussed in this podcast: Discount Rates Gordon Growth Model Discounted Cash Flow Calculation Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode85 Why DCFs should not be used What is a DCF? An estimate of all future cash flow (dividends or earnings) and discounted back to the present. When you add up these values you get the intrinsic value of a company. Gordon Growth Model (perpetual constant growth of a dividend - DCF) P = Div (next year's) / (r-g) R = discount rate (10%) G = constant growth rate in perpetuity. Example: Dividend = $1.64 (Coca-Cola) Specific estimates: $27.85 (based on specific year estimates) Growth rate: 3% = $23.42 (equivalent to a 7% dividend yield) Growth rate: 5% = $32.80 (equivalent to a 5% dividend yield) Current price: approx. $46 per share Always invert. Dividend yield of 3.5% or growth rate of 6.5% in perpetuity. Example 2: P/E ratios for growing companies. I want to estimate how quickly I can reach a 10% earnings yield. I want it to be less than 5 years. Without compounding this means a 10% grower you can pay P/E of 15. A 20% grower you can pay P/E of 20. All of these imply you can sustain that growth for 5 years. Why ignore compounding? It's simpler and conservative. Summary: Discounted Cash Flow calculations and models provide precise estimates of intrinsic value but tend to be flawed. It is much better to improve accuracy by ignoring DCF and using a simple intrinsic value calculation like the Gordon Growth Model.

Mental Models discussed in this podcast: Scuttlebutt Circle of Competence Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode84 Scuttlebutt Challenge: Your Employer's Stock If your company isn't public, assess it qualitatively or do this work on your spouse's company or where a friend works. If you work for a non-profit or government, do the same. Email me your write-up during the month of July 2020 and I'll send you a response. Questions to Ask / Areas to Assess Assess the industry Assess your company's place in the industry What is the culture of your company like? What is the priority of management? Are they shareholder friendly? Are they employee-friendly? Other concerns? How are capital allocation decisions made? How are CapEx decisions made? Does your company earn high returns on capital? Does it use leverage? In summary: Is it a high-quality business? What are the risks? How would you value your employer's stock? (Write down an explicit intrinsic value) Summary: The company you work for should be the first place you look to begin understanding how to perform scuttlebutt. Investors should analyze their employer's stock as a potential investment candidate. Culture, Quality, and Management are key areas.

Mental Models discussed in this podcast: Commodity Leverage Availability Bias (re 2008 Financial Crisis) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode83 Key Characteristics of the banking industry which make it unattractive for investors 2008 Financial Crisis I could probably end this episode with that statement alone. However, there is value in expanding on what bank investors can learn from the 2008 financial crisis. Specifically, how that event may be repeated or rhyme in the future and how to avoid owning a bank that may be affected. Risk Management is primary - which is heavily influenced by management A poor management team can quickly ruin a good bank. This is a problem for investors because it requires evaluating management and understanding their ability and focus on managing risk. This is harder to do than you may expect because nearly all bank managers are going to pay at least lip service to risk management. Buffett once talked about wanting to own a business that could be run by an idiot because eventually, an idiot would run it. Unfortunately, this does not often apply to banks. Why? It will be more clear as we discuss further issues. Banks operate with high leverage In many industries, high leverage can be seen as a sign of risky decision making. With banking, leverage is a feature. High leverage is not only present across the board in the banking industry but is required in order to earn an adequate return. I covered why in episode 79 when we discussed the banking business model. The more leverage a company uses the higher risk of blowing up or bankruptcy due to deteriorating loan performance. This is why management plans such a big role. It is easy to grow a bank by offering loans to people and companies that are not creditworthy. However, doing so sets up failure down the road. Leverage = Double-edged sword. Required for adequate returns, but the potential source of bankruptcy. 2008 was a prime example of how this could occur. Value Traps abound -> History of low returns, especially among small banks While high returning banks that are able to reinvest capital into growth offer great opportunities, there are many more banks that could be a value trap. Small community banks often trade below book value which can appeal to value investors. Yet, you'll find thousands of banks like this which may have returns on equity below 10%. Any growth that these banks experience will lower an investor's return instead of improving it. Time is not on your side if you select the wrong bank because they often don't earn a high enough return. Why? Small towns especially have limited capital available to be stored in a bank. These towns are also heavily hit hard by the move towards online retail, urbanization, and loss of manufacturing jobs. Bankruptcy risk is higher than a normal industry While all companies can fail due to leverage, banks have more leverage than normal. While all companies can fail due to a liquidity trap, a bank's entire business model is based on lending long-term and borrowing short-term. Remember, in episode 82, I talked about the benefit of fewer banks in the industry over time. That only exists because banks continue to fail and/or be bought out by larger competitors. This exemplifies that failure IS an option for many banks and requires a prudent investor. Money is a commodity and banks don't control its price. The Federal Reserve in the United States makes a common practice of manipulating the value and price of money. They determine what short-term interest rate should be. There may come a day when that is no longer true, but for now, at least, banks operate in a manipulated market. This means that in general, banks don't have pricing power. The most cost-efficient banks will win, prosper, and grow. Everyone else will fail or shrink away into obscurity. The profitability of your common bank will be quite different in different interest rate environments. The shape of the yield curve is critical, but any bank you invest in doesn't control the yield curve. Summary: I want to end this episode with a question. It pertains to both my last episode on the attractive qualities and this one on the unattractive. Which of these two sets of information was most new to you? My guess is that my average listener will be more fami

Mental Models discussed in this podcast: Retention Rates Lindy Effect (Durability) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode82 Key Characteristics of the banking industry which make it attractive for investors Fewer Banks over time in the United States Over 23k commercial banks in the United States in 1966. By 2002, that number dropped to 7.8k. In 2018, there were only 4.7k FDIC-insured commercial banks in the United States. Number of New Banks being created has fallen to near zero Before the 2008 financial crisis, about 146 new banks were created each year. Since then, only 1 bank per year has been created. High Retention Rates Relationship-Based If you're a local business you may work with a dedicated banker that helps you out, offering you a loan. You'll probably also hold your personal household accounts with them, your mortgage, college savings fund, checking accounts, etc... Each type of account or loan you have with a bank increases the stickiness of the customer. A bank that is only a checking account is easy to switch. A bank where you have a checking account, multiple savings accounts, a debit card, credit card, mortgage, and car loan is much harder to change away from. Low Competition (Hard to steal a customer) Switching banks is time consuming, difficult, and there is often only a small benefit for doing so. As an industry, bank efficiency is improving over time. Fewer commercial banks in the US = less competition. The weaker banks are the ones failing or being acquired. Fewer bank branches = higher concentration of deposits per branch High retention rates = Large amount of recurring revenue, the stability of deposits, and reduced risk of bank liquidity problems. Financial service companies and the internet = lower costs to service customers, which means more profit per dollar of deposits. Banking is a durable industry It has existed for thousands of years and will continue to exist for thousands more. Lindy Effect Banking as a business is very simple. You collect deposits and make loans. Specifically, we're focused on commercial banking. There is no R&D. Product innovation is unnecessary. There is no inventory that can expire and become worthless. Summary: Banking is an industry with characteristics that are quite attractive to long-term investors. Properly evaluated, a bank can make a great investment. High retention rates, lower competition over time, and the durability of the industry are what attract me to bank investing. References: https://ilsr.org/number-banks-u-s-1966-2014/ https://www.statista.com/statistics/184536/number-of-fdic-insured-us-commercial-bank-institutions/ https://ilsr.org/number-of-new-banks-created-by-year-1993-to-2013/ https://ilsr.org/vanishing-community-banks-national-crisis/

Mental Models discussed in this podcast: Discount Rate Greater Fool Theory Circle of Competence 5-Why Framework Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode81 Bond Returns In the aggregate, bond returns cannot exceed the coupon rate of the bond. Your interest rate earned sets the maximum expected rate of return on that investment. Any potential for gains above this threshold is purely speculative in nature. Greater Fool Theory In today's bond bubble, the only way to justify purchasing bonds in a portfolio is a dependence on the greater fool theory. If you want or expect high returns from your bonds, then you hope that others are foolish enough to buy them from you before they mature. Circle of Competence Your circle of competence is probably smaller than you think. 5-Why Framework This framework is used in the industry to evaluate failures for a root cause analysis. Basically, don't stop with understanding a problem after only asking "Why?" once. You need to dig deeper. Ask "Why?" five times, to reach down to deeper levels of explanation. Find the root cause of a problem, not simply the surface contributing causes. Summary: Investors should always ask why when evaluating investments. This includes understanding the underlying reasons for their investing strategy, why they earn an excess return, and the edge of their circle of competence.

Mental Models discussed in this podcast: Discount Rate Equity Risk Premium Second-Order Effects Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode80 Interest Rates I discuss The Fed and their recent actions to lower interest rates to zero using the overnight lending rate. I also cover the equity risk premium and second-order effects of zero interest rates. Discount Rates Your Required Rate of Return Your need to save and invest can increase as rates fall Summary: When the Fed reduces interest rates to zero the first-order effect is a disincentive to save. Yet, zero interest rates should not reduce your discount rate because the second-order effect is because lower returns would increase your need to save money.

Mental Models discussed in this podcast: Leverage Fractional Reserve Banking Margin Economies of Scale Operational Leverage Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode79 Banking Business Model - Key Concepts As some of you may remember, one of my goals for this year is to improve my understanding of bank stocks. Today's podcast will focus on the basic business model that banks use to make money. Key Concepts: Deposits Cost of Deposits Direct Cost: Interest Rates paid on Deposits Indirect Cost: Overhead (Employees, Rent, etc...) Loan Yields Loan Losses Fractional Reserve Banking -> Leverage Rate ROE = ROA * Leverage Banking Profits = Loan Yields - Loan Losses - Cost of Deposits - Overhead A recent movie I enjoyed about Banking Recently watched: The Banker on Apple TV+ Two black entrepreneurs in the 1960s buy two Texas banks. Samuel L. Jackson Anthony Mackie The movie follows their journey and the ensuing blowback by Jim Crow. One of the things the movie did very well was to explain the basic banking business model. Banks are easiest to understand when you focus on single branch banks instead of large money center banks like JP Morgan or Wells Fargo. Summary: Banking is the business of bringing in deposits and lending them out. Banking is a perfect example of a capital intensive business. A bank cannot grow unless it receives capital in the form of deposits. Deposits are the lifeblood of a bank and only through healthy deposit growth can a bank sustainably grow loans and therefore profits.

Mental Models discussed in this podcast: Earnings Yield Discount Rate Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode78 Earnings Yield on Cost In our last episode, we discussed the source of investment returns. In this episode, we'll dive deeper into the nuance of stock valuation. A rule of thumb is a simple reference point method to quickly determine whether a stock is overvalued or undervalued. A rule of thumb for valuation is not a substitute for valuation, but simply a starting point to allow you to focus and prioritize your time on ideas that appear to be good values. Earnings Yield - Current Earnings / Stock Price Earnings Yield on Cost: Possible Future Earnings / Original Stock Purchase Price Rule of thumb: Earnings yield on cost must eventually exceed 10% in order to earn a 10% rate of return on your investment (due to business performance) versus speculation. Investing Rule - Earnings Yield and Discount Rate Stocks must eventually trade at an earnings yield on cost equal to your discount rate in order to earn your required return on capital for you as an investor. Stock Investing Examples Amazon $1.22T Market Cap 2019 Earnings: $11.5B Earnings Yield: 0.9% Apple $1.38T Market Cap 2019 Earnings: $55B Earnings Yield: 3.9% Discover Financial $14.5B Market Cap: 2019 Earnings: $2.9B Earnings Yield: 20% NACCO $184m Market Cap 2019 Earnings: $39m Earnings Yield: 21.2%

Mental Models discussed in this podcast: Mean Reversion Inertia Reinvestment Rate Return on Incremental Invested Capital (ROIIC) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode77 Source of Investment Return Investments, as opposed to speculations or gambling, is a method of seeking returns while protecting principal. Therefore, it is critical to understand the source of your investment returns. You are not entitled to investment returns. You don't have a God-given right to earn an excess return on your investments. So what is the source of your returns? Hint: It will vary by the type of investor you are. Examples: Mean Reversion Net-Net Investors Value Investors Inertia Momentum Investors Future Business Performance Quality Investors Low Reinvestment Rate High Return on Incremental invested capital Growth Investors High Reinvestment Rate (often 100%) Low-Medium return on incremental invested capital No dividends Dividend Growth Investors Low-Medium Reinvestment Rate Stable return on incremental invested capital

Mental Models discussed in this podcast: Operating Leverage Davis Double Play Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode76 How to identify 10-bagger investments A 10-bagger investment: We're going to focus on how to 10x your money over a 10-year time period. I'll discuss examples and what to look for in an investment in order to identify these types of opportunities. This represents a 25.8% annualized rate of return. (Massively exceeding the average 10% return in the stock market.) Example 1: "Davis Double Play" Grow an investment from $10 per share to $100 per share. If done over a period of 10 years we know this is a >25% rate of return. Starting EPS: $1, doubles every 5 years, so it ends at $4 per share. Starting buy price: $10 per share (P/E of 10.) Sell price: $100 per share (P/E of 25) - Find companies capable of becoming overvalued Earnings growth rate: 14.8% per year Multiple expansion contribution: 9.6% per year Example 2: Deep Value Starting EPS: $2.50 per share Ending EPS: $5.00 per share (7% growth rate) Starting price: $10 per share (P/E of 4) Ending Price: $100 per share (P/E of 20) (17% contribution from multiple expansion) Example 3: Hypergrowth A very simple example Starting EPS: $0.50 per share Ending EPS: $5 per share (25% EPS growth rate) Starting price: $10 per share (P/E of 20) Ending price: $100 per share (P/E of 20) (0% contribution) Key Characteristics of 10-bagger potential stocks Low Price (Ideally target companies with a P/E multiple less than 10) Operating leverage (Should be able to grow earnings faster than revenue) Turnarounds (Flipping from unprofitable or breakeven to profitable can lead to large earnings growth AND multiple expansion) Microcaps and Nano caps (Smaller companies are more likely to benefit because they may be more overlooked) Growth is critical to a 10-year ten bagger Summary: My preferred method of identifying potential 10-bagger stocks is to seek Davis Double Play type investments. I want cheap stocks with the potential to become overvalued. In order for an investment to become a 10-bagger and earn 10x your money in 10 years it needs to have certain traits: Low price, operating leverage, turnaround situation, overlooked company, and earnings growth. References Focused Compounding Note on Davis Double Play

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode75 How coronavirus has modified the distribution of investment returns Reference: Episode 63 - Your Portfolio should reflect your investing strategy Net Nets can be incorporated into a high-quality portfolio by portioning out a subset of the portfolio for that new strategy. Summary: In this episode, I describe how to incorporate multiple investing strategies into a single stock portfolio. Your portfolio can successfully leverage dividend growth investing, momentum, high-quality stocks, and deep value stocks like net-nets.

Mental Models discussed in this podcast: Arbitrage Efficient Market Hypothesis Brand Power Luxury Power Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode74 Merger Arbitrage - Examples and Discussion What is Merger Arbitrage? On November 24th, 2019, Louis Vuitton announced the acquisition of Tiffany for $135 per share. As of today's record, on April 18th, 2020, Tiffany was trading at $129.15. (4.5% gain to reach a takeover price of $135 per share) As of March 18th, 2020, Tiffany stock reached a low of below $112 per share. (represents a 20.5% gain to reach $135 takeover price) Very low-risk takeover. On the day of the announcement, shares rose to over $134 per share. Summary: Merger Arbitrage is an investing strategy designed to capture the value in price differences between a soon to be acquired company and the acquisition price. Investors can sometimes earn high returns at low risk using this strategy. References SpecialSituationInvestments.com @InvestSpecial on Twitter https://www.foxbusiness.com/markets/tiffany-stockholders-approve-merger-with-lvmh

Mental Models discussed in this podcast: Second-Order Effects Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode73 How COVID-19 could cause a depression The world economy has caught the flu and it is unlikely to go away once COVID-19 is under control The problem with the flue is that it hits like a truck and knocks you down for a few days. Then for weeks afterward you're likely to feel tired and exhausted. While the coronavirus doesn't cause the flu, it has created a global shutdown of the economy. Global trade is massively impaired due to borders being closed. The domestic economy is impaired due to shelter-in-place orders and government-mandated closure of non-essential businesses. Right now we're in the phase of economic flu where the economy feels like it has been hit by a truck. This phase will be relatively short. The problem that most aren't anticipating is the second-order effects, the long period of feeling tired and exhausted that our economy is going to go through while we recover. Second-order effects will be set off due to: Large layoffs where people are not quickly hired back after the shutdown. Small business failures due to the limited margin in their operations. Restaurants will close permanently. Hair salons Dentist offices Your local auto repair shop Gas stations may fail Each of these businesses is cumulatively a large part of the employment for individual cities and towns. Yet, we can expect a potential failure of these businesses at an alarming rate if the shutdown continues for too long. Large businesses will layoff employees for longer than the shutdown period. Move Theatres may go bankrupt. (See: AMC) Cruise lines will be restructured. (Carnival already has) Air travel may be impaired for a year. The automotive industry is likely to be impacted by reduced consumer income for a long time. There is a time limit to this shutdown. If it continues past a certain date, a date which we cannot know where the line is in advance, the economy could dive into a depression. The line between recession and depression is blurry. The tipping point is the failure of small businesses that cannot simply be restarted after the shutdown is lifted. Summary: Investors today are likely underestimating the second-order effects of the coronavirus shutdown. Layoffs and bankruptcies will have long-lasting adverse effects on the economy. If the number of layoffs and bankruptcies gets too high, the economy will likely exceed a simple recession and enter a medium-term depression. References Joshua Kennon's question: What Price Should We Pay to fight COVID-19?

Mental Models discussed in this podcast: Normal Distribution (Statistics) Resulting (Read: Annie Duke's book) Efficient Market Hypothesis Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode72 How coronavirus has modified the distribution of investment returns Typical investing outcomes - single distribution of possibilities High likelihood of a single point of returns (say 6%) Low probability of super high returns (>12%) Low probability of super-low returns ( Today's environment has a bimodal outcome for many companies directly impacted by the coronavirus shutdown. Instead of a single point of high probability outcomes, we have two center points. (15% and -80%) One may be around 15-20% annualized returns, but the other is highly negative and bounded by the zero-based outcome of the bankruptcy of the company. "The market has priced it in." It is almost impossible for the market to accurately price in a bimodal distribution of potential returns. Summary: Investors today are likely underestimating the potential for bankruptcy of their favorite companies. Regardless of the long-term return of underlying assets, bankruptcy is possible when debt covenants are breached or a negative liquidity event occurs. Both are possible outcomes in today's investing environment as most companies are not well situated for handling a long period of zero revenues. (Not zero profits, but zero revenues)

Mental Models discussed in this podcast: Moral Hazard 2nd Order Effects Anti-Fragile Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode71 Government Bailouts create moral hazard in the economy Government bailouts reduce or eliminate the incentive for businesses to prudently manage their finances. Moral hazard is created by these bailouts. CEOs, board members, and shareholders know that any profits they make they get to keep. Yet, if massive losses appear they can simply appeal to future government leaders to save their job. This has to stop! If you privatize profits and socialize losses, this isn't capitalism. Instead, it creates a situation where the public becomes aware that the game is rigged and wants to tear down the whole system. The Federal Reserve and the United States government have repeatedly implemented a playbook where they try and prevent recessions and bankruptcy. This perverts the intent of capitalism. We are meant to have cycles. We are expected to have businesses fail. Only by allowing weak and poorly managed businesses to fail can we truly have stronger businesses arise and grow at their optimal rate. Summary: The United States Government and governments around the world have been behaving in a manner that is counterproductive. They have created a moral hazard of encouraging individuals and businesses to take selfish action and to not manage their affairs prudently because they know that they can expect bailouts in the future. In the short term, this seems like the right thing to do. Yet, it lays the groundwork for the long-term failure and fragility of our economic system.

Mental Models discussed in this podcast: Dividend Aristocrats Dividend Growth Investing Discount Rates Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode70 Current Clearance Sale on Oil Major Stocks As of recording on March 20th, the oil majors trade with the following dividend yields: ExxonMobil $33 per share, $3.48 dividend, 10.5% yield Dividend Aristocrat = 37 consecutive years of dividend increases Uninterrupted dividends since 1882 Chevron $58 per share, $5.16 dividend, 8.9% yield Dividend Aristocrat = 32 consecutive years of dividend increases Uninterrupted dividends since 1912 Royal Dutch Shell $24 per share, $3.76 dividend, 15.6% yield BP $18 per share, $2.52 dividend, 14% yield TOTAL $27 per share, $2.93 dividend, 10.8% yield Summary: During stock market crashes correlations tend to go to 1 and many stocks trade together, both the good and the bad. Market dislocations like this, therefore, offer many opportunities to buy individual stocks at great prices. Today offers that opportunity in the oil supermajors. You have the ability to buy companies at double-digit dividend yields that have raised their dividend every year for over 30 years. This is a once in a 50-year occurrence in the oil industry. Other References: Episode 12 of the DIY Investing Podcast on Oil Majors 2015 Oil Stock Clearance Article Joshua Kennon's review of investing in oil majors

Call to Action: Support the Podcast: If you're subscribed to the podcast and have been enjoying my content on the podcast, consider giving me a five-star rating and review. I need many more ratings and reviews than I have currently received if the podcast audience is to grow. Right now I only have about 1-2% of my podcast audience having left a rating and review. If you're in that 2% thank you very much. If you're part of the 98%, please consider taking just 30 seconds to leave me a 5-star review in your podcast app. I would really appreciate it. Mental Models discussed in this podcast: Tax Avoidance Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode69 Questions from Listeners on Twitter Why should you study Value Investing at all? Roth IRA vs Taxable Accounts What to do when friends and family ask advice about stocks?

Call to Action: For You: Do you agree with my view on cash not being worthy of a strategic allocation in your portfolio? Either way, you should write down and document your view on cash in your asset allocation strategy. This should be a line item in your investment strategy document. If you don't have a written strategy for cash you're more likely to make subpar decisions because you likely won't have a strategy at all. Support the Podcast: If you're subscribed to the podcast and have been enjoying my content, consider also subscribing to my YouTube Channel. One of my goals this year is to publish short investing videos to my YouTube channel in addition to my weekly podcast. Right now most of my YouTube videos are simply podcast episodes. But if I can grow my audience of subscribers on YouTUbe that would be greater encouragement for me to produce additional YouTube videos this year. Mental Models discussed in this podcast: Opportunity Costs Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode68 Listener Question from Twitter: "Most value investors aren't what you would call market timers. But how do you think of cash strategically in your portfolio? Do you view it as an option on a better future opportunity set? Or as a potential drag on returns?" -Brian from Twitter Follow me on Twitter and send me your questions and they may be answered on the podcast in the future. My views on Strategic Cash Allocation Strategy Both. I view cash as both an opportunity on a better future opportunity set AND a potential drag on returns. My preferred cash allocation is 0%. I want to be 100% invested in assets that can meet my hurdle rate of return of 10% or greater. Therefore, preferably I would be 100% invested in stocks that each individually offers me a high probability of achieving a 10% rate of return during my holding period. Am I always 100% invested in stocks: No. Cash should be held if you don't have any good ideas and/or already have too much money invested in the good ideas that you do have. In order to prevent myself from holding cash, I concentrate my portfolio, so I need less good ideas. Summary: I don't hold a strategic cash allocation in my portfolio. That is because I view cash as both an option for a better opportunity set in the future and as a drag on returns. This means that my ideal cash allocation is 0%. As soon as I identify assets that meet my target rate of return, I buy them to eliminate my cash allocation. I am not going to wait for 12% return opportunities when 10% opportunities are available today.

Call to Action: For You: Take out a notebook or word document. Write a list of everything that you can think of that is preventing you from achieving your goals. This can focus on whatever part of your life you want. If its investing, identify the weaknesses of your investing process. If its personal finance, what are you spending money on that you can eliminate? Whatever your goals, make a list, and start allowing addition through subtraction to work for you. Support the Podcast: Pick your favorite episode of my podcast and share it with one of your friends or family members. Talk to them in person, send them an email, or share it through text. I would really appreciate your support. Mental Models discussed in this podcast: Addition through Subtraction Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode67 Addition through Subtraction Mental Model First introduced to me by Joshua Kennon on his blog. https://www.joshuakennon.com/mental-model-addition-through-subtraction/ You can improve aspects of your life, whether that's personal finance or your investing process by removing things instead of always trying to add things. Companies can do this as well. Apple is a great example of a company that has been able to leverage Addition by Subtraction. They improved the smartphone by removing the physical keyboard. This led to the creation of the iPhone. Challenge for you today: What is preventing you from achieving your goals? What actions are you taking, what distraction are you allowing into your life, and what investments do you currently own, that are limiting your ability to achieve success? Summary: When trying to improve don't solely focus on adding things to your life or adding steps to your investing process. It is important to also spend time trying to identify and remove pieces that are slowing you down or preventing you from achieving your goals. The addition through subtraction mental model captures this simple truth in a way that I believe is useful.

Call to Action: For You: Check your current stocks for the presence of net operating losses that can offset future taxes and read about Myrexis and Affymax to gain a better understanding of some of the extremes you may find in the market. Support the Podcast: The best support you can give me right now is to follow me on Twitter: @TreyHenninger Mental Models discussed in this podcast: Tax Avoidance Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode66 Net Operating Losses are a form of Hidden Asset NOLs are past losses by the company that offset future taxes They are only valuable if you have the ability to earn a profit in the future Elementary Value recently highlighted two companies that are an interesting avenue for future research. Myrexis (MYRX) https://www.elementaryvalue.com/blog/myrexis-inc-myrx-another-couchman-nol-stub Affymax (AFFY) https://www.elementaryvalue.com/blog/affymax-affy-a-couchman-controlled-nol-stub Summary: When researching a company be on the lookout for hidden assets. Net Operating Losses are one form of hidden asset that can either be found on the balance sheet or in the notes to the financial statements about a company. The ability of a company to not pay any taxes for 10-15 years into the future can be extremely valuable in the right situation.

Call to Action: For You: Write down a list of every country which you will exclude from investing for reasons such as this or similar. Stick to it. Support the Podcast: The best support you can give me right now is simply to give this podcast a rating and review in your podcast player. Mental Models discussed in this podcast: Corruption Property Rights Government Ownership of Means of Production Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode65 Two Key Characteristics Shared by Russia and China High Government ownership of key businesses Could lead to corruption Businesses could be influenced to make uneconomic investments I can't trust the numbers. (Due to the communist government) Corporate frauds are more common Both Russia and China have a critical lack of property rights. Summary: If you are going to make any investment you need to be sure that your principal is safe and a reasonable return on your investment is likely. Lack of strong property rights threatens my principal and government control of businesses threatens my reasonable rate of return.

Mental Models discussed in this podcast: Modern Portfolio Theory Compound Interest Rebalancing Beta / Volatility Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode64 Modern Portfolio Theory According to Investopedia: Modern Portfolio Theory definition Modified Doubling Penny Example Three scenarios are compared: Base Case Compounding Diversified Portfolio Diversified Portfolio with Rebalancing It is a mistake to rebalance from an investment with high return potential into an investment with low return potential. If you are going to sell an investment that is up for one that is down then you should be confident that the lower cost investment actually offers a better return. Don't trade 10% return expectations in stocks for 2% return expectations in bonds. Betting on future volatility to allow you to rebalance back again is gambling not investing. Summary: Rebalancing is an often mentioned tactic utilized in modern portfolios but seldom is it examined from first principles. The act of rebalancing can be useful to offset volatility amongst assets within similar return profiles. However, rebalancing between assets that differ in potential returns can lead to disaster. Compounding requires the ability to earn interest upon interest. If you rebalance away from the compounding asset, then you will counteract the powerful effects of compound interest.

Mental Models discussed in this podcast: Concentration vs Diversification Expected Value Probabilistic Thinking Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode63 Not every stock is right for every Value Investor Just because a company is cheap doesn't mean you should own it You need to learn to recognize the types of stocks that appeal to you and your strategy, while at the same time ignoring those stocks which don't work for your strategy. Focus Areas to Discuss: Deep Value Stocks Quality Stocks Momentum Stocks Growth Stocks Concentrated vs Diversified Portfolios Summary: Portfolio management is a critical means by which an investor implements their investing strategy. Everything flows from your portfolio decisions: including returns, risk, and your general feeling and emotions of investing. Therefore, it is critical to align your portfolio and stock selection with your chosen strategy. Concentrated investors should not be buying deep value stocks. By the same token, diversified portfolios are better able to incorporate coin flip stocks with binary potential and high expected value. Don't make the mistake of building a diversified portfolio with stocks that fit a concentrated portfolio and vice versa.

Recommended Resources: Unconventional Success by David Swenson William Bernstein's books on Asset Allocation PortfolioVisualizer.com Bogleheads Forum (Simba's backtesting spreadsheet) PortfolioCharts.com How to connect with Value Stock Geek Follow his work on Twitter: @ValueStockGeek Check out his website: ValueStockGeek.com Lazy Portfolio Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with Value Stock Geek The full show notes for this episode are available at https://www.diyinvesting.org/Episode62 Passive Asset Allocation Strategy Why should active investors have a passive asset allocation strategy? Goals of a passive investing strategy as compared to active investing Principles used to create the strategy Are bond allocations obsolete with interest rates so low? Backtesting performance and planning for the future Portfolio Allocation US Small Cap Value: VBR (0.12% expense ratio) International Small Cap Stocks: VSS (0.12% expense ratio) REITs: VNQ (0.12% expense ratio) Long-Term US Bonds: VGLT (0.07% expense ratio) TIPS: VTIP (0.06% expense ratio) Equal weighted at 20%

Mental Models discussed in this podcast: Leverage Risk Management Uncertainty / Probabilistic Thinking Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode61 What is good about leverage? Using other people's money to make investments has the potential to improve your long-term financial outcomes. What is bad about margin debt? Callability (#1) High-interest rates Non-fixed interest rates Can be forced to sell your investments at a bad time Solution: We need a method that is the opposite of margin debt: Result: Mortgage Debt What is good about mortgage debt? Non-callable Low fixed interest rates A missed mortgage payment doesn't force you to sell your investments. The bank you owe the mortgage to is often a different financial entity than the custodian of your equity portfolio. Would you rather have home equity or stock equity? Risk tolerance Return Potential Summary: Over the long-term, you will maximize your investment returns if you can somehow use other people's money to invest. Debt leverage allows you to access other people's money for your personal benefit. However, we must remember Benjamin Graham's words: "On what terms and at what price?" The terms of the debt matter and the price of the debt also matters. Margin debt has bad terms and a high price. If you choose to leverage your portfolio, you need to select the best form of debt in which to do so. Mortgage debt tends to have the best government protections.

Mental Models discussed in this podcast: Carpe Diem (Seize the Day) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode60 Opportunities are Rare: Go the Extra Mile What do you do when you've identified a great opportunity? This is an opportunity that meets all of your requirements: High Quality Cheap Easy to Understand Durable business Predictable Do you buy it? What if you can't easily do so? What if your current broker won't let you buy it? Is it time to give up and move on? No. It's harder to find new opportunities than it is to go through some work and find a way to make the purchase happen. Go the extra mile! When Warren Buffett wanted to buy small companies he sometimes had to go searching for the individual owners and convince them to sell. He went the extra mile. What will you do? Summary: Investors can sometimes fail by not seizing available opportunities. When an investment opportunity meets your requirements you should go the extra mile if needed to make that investment. Opportunities are relatively rare. It is sometimes easier to put in additional effort to purchase the stocks you already have identified as worthy, then to find similar companies that meet the same high standard.

Mental Models discussed in this podcast: Hedging and Insurance Costs Purchasing Power Parity Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode59 Understanding Currency Exchange Rates Most world currencies are free-floating Their value fluctuates in price every day against all other currencies They are fiat currencies. Which means no assets back up their value. Such as gold or real estate. Instead, the value of all currencies is simply based on trust. Exchange rates, therefore, embed assumptions about the future outlook for each country. This can include factors like interest rates, currency creation, or central bank policy. Purchasing Power Parity Hamburger test: How much does it cost to purchase a McDonalds Hamburger in each country. In some countries, the hamburger will be cheaper than the others. How does this relate to investing in companies? When you buy foreign stocks, you have two key risks: The company buys and sells its goods in a different currency than the one you use in your country. You bought the stock in a different currency than the one you use in your country. If exchange rates change, you could face additional gains or losses. How to manage currency risk Question: Should you hedge? Answer: No. (Hedging is a form of insurance => Therefore, you lose in the long run.) In the long run, currency exchange rates are fairly stable. If you're a long term investor, then currency risk should be fairly minimal. As long as you avoid leverage and only ever buy companies with cash, you shouldn't be forced into a situation where currency risk threatens your well being. With that said, it can be helpful to be aware of potential major macro changes that could affect your investments in foreign currencies. Stuff like Brexit which is a known item that caused a decline in the British Pound during uncertainty could have been expected to rise (as it has) once the uncertainty was reduced. Simply avoid countries where negative surprises are likely. (Dictatorships, Corruption, Massive Debt problems, etc...) [Hint: You should be doing this anyway] Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. One potential risk of earning an acceptable return is for your investment returns to be eroded by changes in the value of foreign currency. You can limit this risk by avoiding countries with large problems that may impact the currency. Hedging this risk is a mistake because it guarantees a loss if you always hedge currency risk over your investment lifetime.

Mental Models discussed in this podcast: Circle of Competence Habits Resulting (read: "Thinking in Bets" by Annie Duke) Focus on Process over Results Networking Effects Signal vs Noise Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode58 How to think about investing goals The important thing to remember about goals is that you need to focus on what you can control. You don't control investing outcomes, you can only control your investing process. Therefore, any goal that explicitly mentions a specific investing outcome is bound to result in disappointment and frustration. (Such as "My goal is to earn a 10% return this year." Replace 10% with whatever number you like, it's not a helpful goal.) Parts of the Investment Process Worthy of Goals Your research process Investing Habits Growing your circle of competence Building a network of investors Refining your investing strategy (Finding weaknesses) My personal investing goals for 2020: Identify one company worthy of investing 20% of my portfolio. Actually invest in that company. How might I do that? Filter through a lot of companies. Maybe I set a goal of reading one 10k a week. That allows me to read over 50 10k's in the year. Perhaps after looking at 50 companies, I might find one worth investing money in. Focus on identifying high-quality companies. If a company is unlikely to be of high quality, it probably shouldn't fit in my list of 50 companies to review in detail. Focus on cheap companies. If the company isn't cheap, it's unlikely to be a stock I invest in this year. Focus on companies with the ability to distribute a large amount of cash to shareholders. I tend to prefer capital-light businesses, so I should focus my time and effort there. Investing Habits: Identify and eliminate one bad investing habit that I'm currently doing, and implement one new investing habit that should have a positive outcome. In 2018, my focus was on removing investing noise from sources like CNBC. In 2020, I think my goal is to only check stock prices once a week. Grow your circle of competence: In 2020, I really want to better understand banks and the banking industry. Banks seem like fertile ground for new long-term investments especially when interest rates are low. So, I want to focus on building expertise as a bank investor. Building a network of investors: In 2020, I want to interview 12 different investors on my podcast. Each interview teaches me something new about investing and grows my network of investors to learn from and source ideas. In addition, in 2020 I want to grow my Twitter following to surpass 1,000 followers. I have found FinTwit (Financial Twitter) to be a huge boon in helping me learn more about investing. As I connect more with other investors on Twitter, I hope to become an even better investor. Refining my investing strategy (Finding my weaknesses) If I knew my investing weakness that I would discover today, it wouldn't be a goal. So, I'll simply plan to complete a post-mortem analysis on each of the companies that I sold in 2019 to see what I can learn from those investments. I wish I had already completed those post mortems, but I should have time to complete it in 2020. Summary: In summary, focus on improving your investing process. Only by focusing on what you can control and improve on, will you actually see long-term improvements in your investing results. Simply making a goal to improve investment results will not help you. You have to identify your weaknesses and eliminate them. Meanwhile, grow and build on your strengths. Over time, and executed on each year, you should become a much better investor.

How to connect with David Keller Follow his work on Twitter: @DKellerCMT David Keller's Websites: MarketMisbehavior.com (home of Sierra Alpha Research) Includes a blog and YouTube Channel https://stockcharts.com/ Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode57 Part 1: Applied Technical Analysis for Fundamental Investors Technical analysis quantifies investor behavior Charts can help you filter investment ideas after they have passed a fundamental analysis process. "What are the best 5 ideas TODAY." Value Investors would most benefit from using: Leading indicators: Demark Indicators anticipate reversals Lagging indicator: RSI (Relative Strength Index) measures price momentum Part 2: Behavioral Finance and Mental Models Key Behavioral Biases / Mental Models that investors struggle with: Confirmation Bias - Give greater weight to evidence that agrees with you Narrative Bias - We love stories Endowment Effect - Falling in love with your stocks Investor Habits that lead to Success: Keep an investment journal (Why are you buying?) After each investment: Write a post-mortem analysis Find a tribe. Who will hold you accountable and help you grow?

How to connect with Dan Schum Follow his work on Twitter: @NoNameStocks Dan Schum's Website: NoNameStocks.com Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode56 Part 1: Dan Schum's Investing Process Large diversification 30-60+ stocks Buy "NoNameStocks" that no one else has heard about Target characteristics: Left for dead companies Often unprofitable Dark or Deregistered from the SEC A long-term chart that shows abandonment by investors Part 2: Example Stocks HemaCare Corporation $HEMA - Dan's 100 bagger in 4.5 years (From $0.25 to $25.40 buyout on the podcast recording date of 12/16/2019) Clancey Systems International $CLSI - A wild ride on a shell company with no assets leading to a 1000% gain in a few months Dewey Electronics $DEWY - A company that just won't die, but with hidden real estate assets worth more than the market cap.

Mental Models discussed in this podcast: Inflation Mr. Market Purchasing Power Pricing Power Discount Rates Risk Premium Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode55 What is inflation? Inflation has many definitions depending upon your source and audience. However, for investors only one definition matters. Inflation is the loss of purchasing power of your money over time. Inflation Risk Key Aspect #1: The simple presence of inflation requires an investor to profitably invest their money at a rate of return higher than inflation. Therefore, inflation risk, on the one hand, can mean that investors have a constant need to invest otherwise their money loses value. Key Aspect #2: Inflation is a critical input to many theoretical investment pricing models. Whether explicit or implicit, investors around the world make assumptions about future inflation when choosing what investments to make. If future inflation does not match these expectations substantial changes in the price of securities (including stocks and bonds) may occur. Key Aspect #3: Companies price their products and services in nominal currency. (This coat costs $100 USD or $100 EUR). They don't price goods in real terms, like "4 hrs of labor" or "8 hrs of labor." As inflation occurs some companies will be able to raise their prices. Others won't be able to. This means that companies will generally fall into 3 categories in the presence of inflation: Category 1: As their costs rise, the company is unable to pass on these costs to their customers. Therefore, the company becomes less profitable. Examples: Commodity companies Category 2: As their costs rise, the company is able to pass on these costs to their customers. Therefore, the company can maintain profitability in the face of inflation. Examples: Media companies, TIPS, NACCO Category 3: As their costs rise, the company is able to raise their prices at a rate faster than inflation. Therefore, the company can become more profitable during periods of inflation. Sometimes known as Defense Companies, High-Quality Companies, or Blue Chips. Examples: Tobacco Companies, Banks, Category 1 & 2 are much more common. How to manage Inflation Risk In times of high inflation, be aware that low inflation may return in the future. You can sometimes lock in high rates of return on low-risk investments when others only anticipate ever-higher inflation forever. In times of low inflation, don't forget that high inflation is always a possibility. Position yourself to own companies that can thrive in both low and high inflation. Don't simply latch onto those companies that only thrive in low inflation environments. Pricing power is critical to successful investing. Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. The very minimum must be to at least earn a return that exceeds the rate of inflation. Ideally, you'll earn a risk premium above inflation. In today's investing environment, low inflation is the accepted norm and many predict low inflation far into the future. Perhaps one of your biggest opportunities is to, therefore, find and invest in the subset of companies that will thrive when high inflation returns. When the rest of the market gets hammered, your investments would be safe.

Mental Models discussed in this podcast: Margin of Safety Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode54 What is a quality business? (Classification Guide) What is a quality business? One thing above all else determines whether a business is "high quality." That is predictability. A high-quality business is predictable in terms of future cash flows available to owners. This definition may differ from others you have heard that focus purely on return on invested capital or other quantitative metrics. The reason is simple: The hardest part of investing is predicting the future. Therefore, you should prioritize investing in companies that are easiest for you to predict their future. A quality pyramid of 7 tiers. Each progressively smaller than the tier before it Tier 0 - Too Hard Pile Tier 1 - Speculations Tier 2 - Bad Businesses Tier 3 - Average Businesses The above tiers are the bulk of companies. If you are rating companies and most of your ratings fall outside of those tiers, then you are either rating companies wrong or you are already narrowed down into a select group of companies. [Buy Line] Tier 4 - High-Quality Businesses Tier 5 - Excellent Quality Businesses Tier 6 - Generational Businesses Business Quality Reports: Patrons (or Premium Members of DIY Investing) receive free access to my personal investing research and all of the business quality reports that I create. If you're interested in learning more, you can read all about the premium membership here. Every listener of this podcast can read this free sample report on Disney. Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. One way to improve the odds of achieving this goal is to classify the companies you research into quality tiers. By always beginning your research with a quality classification, you can limit investing mistakes and maximize your margin of safety during the quantitative part of the investing process

Mental Models discussed in this podcast: Bias towards action Liquidity Mr. Market Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode53 How to buy illiquid stocks The purchasing of illiquid stocks presents some challenges. Your buying process needs to be focused on overcoming those challenges. The challenges are 3-fold: Acquiring a full position size Not pushing the stock price up too far Too far is defined as beyond a purchase price that provides a sufficient margin of safety Managing your personal impatience and bias towards action Initial purchase attempt: Ideally, you've studied how the stock price has traded in recent days. If the average daily trading volume exceeds your total position size, it's not an illiquid stock for you. Use limit orders If last trade is above my target price, set a limit buy order at your target price If the last trade is below my target price, consider setting a limit buy order at the last trade price, but above the current bid. (if any) Adjust your purchase price based on new information Study changes in ask price and any executions that occur More liquidity usually exists than is actually traded on an average day. You can take the whole volume if the price is right. Offer up a large number of shares in a bid that doesn't actually move the stock price up. Summary: Purchasing illiquid stocks is all about managing your relationship with Mr. Market. When you seek to acquire a full position you need to avoid pushing the stock price up too quickly. This can draw attention to the stock from competing investors. Meanwhile, you'll need to manage your personal impatience in order to successfully fill your position at a reasonable price.

Book: The Acquirer's Multiple by Tobias Carlisle If you enjoyed this podcast episode and would like to learn more about Deep Value Investing, consider purchasing the book through one of the following affiliate links. Available at Amazon for Kindle Available at Audible as an Audiobook Available at Amazon as a Paperback Thank you for your support. How to connect with Tobias Carlisle Follow his work on Twitter: @Greenbackd Tobias Carlisle's Website: AcquirersMultiple.com His website includes a Free Deep Value Stock Screener Tobias Carlisle's ETF: https://acquirersfund.com/ Ticker: ZIG Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with Tobias Carlisle The full show notes for this episode are available at https://www.diyinvesting.org/Episode52 Book: The Acquirer's Multiple (Interactive Review with Author) Deep Value Investing Is Deep Value only a good strategy when control situations are viable? Activists benefit deep value investors beyond themselves Mid-Cap Stocks are a prime market because of so many activists Negative Enterprise Value Stocks – Great portfolio for investors without liquidity restrictions The Acquirer's Multiple: EV / Operating Earnings A multiple of 10 or less or a 10% earnings yield is a good target How could Mean Reversion fail or stop working? (Key Deep Value Assumption) Can Business Analysis be learned? (And is it even worth it?) What value does a portfolio manager provide over a computer in the deep value space? Tobias's ETF: ZIG ('ZIG when the market zags')

Mental Models discussed in this podcast: Opportunity cost Loss Aversion Diversification vs Concentration Price Anchoring Zero-Based Budgeting Commitment Bias Game Theory: Minimax Theorem Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode51 My portfolio Current/Future State Owned 11 stocks 5 winners 5 losers 1 borderline loser The goal is to reduce to 5 positions Sold 4 stocks so far (made money on 2, lost money on 2) Not all "losers" lost money. Some made money. It's all about future return potential from here Summary: It's all about opportunity cost. Use rational analysis to overcome your behavioral biases.

How to connect with Tim Eriksen Follow his work on Twitter: @eriksen_tim Reach out by email [email protected] Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with Tim Eriksen The full show notes for this episode are available at https://www.diyinvesting.org/Episode50 Part 1: Tim Eriksen's Investing Process Own 20-25 positions Top 5 positions will be generally 50% of the portfolio Microcap stocks outperform large, mid, or small-cap companies Stability and modest growth investor Target low P/E stocks Stable earnings are punished in the current market Part 2: Example Stocks Beaver Land Company $BVERS - 50,000 acres in the United States leased out and royalty revenue Western Capital Resources $WCRS - A net-net closely tied to a private equity firm in Maryland P10 Holdings $PIOE - A private equity management company. They earn asset management fees. JG Boswell $BWEL - Own 150,000 acres north of Baker's Field in California including 400,000-acre feet water rights.

How to connect with Value Stock Geek Follow his work on Twitter: @ValueStockGeek Check out his website: ValueStockGeek.com Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with Value Stock Geek The full show notes for this episode are available at https://www.diyinvesting.org/Episode49 Part 1: ValueStockGeek's Investing Process Basket of Stocks (20-30 positions) Value: Cheap Stocks with Good Balance Sheets Uses multiple valuation ratio's but prefers "Acquirer's Multiple" EV/EBIT See Tobias Carlisle's book: The Acquirer's Multiple High portfolio turnover 50-100% churn every year Why the Quality factor reduces your returns How to improve your stock-picking success rate by focusing on the balance sheet Part 2: Example Stocks Micron Technology ($MU) - Cheapest stock in the S&P 500 Flanigan's Enterprises, Inc. ($BDL) - A microcap company that owns bars, restaurants, and liquor stores in Florida Dick's Sporting Goods ($DKS) - A retail company focused on the niche of outdoor sporting goods equipment

How to connect with David Flood (Elementary Value) Follow his work on Twitter: @ElementaryValue Check out his website: ElementaryValue Investing Blog The company articles discussed in this podcast: Pinelawn Cemetary (PLWN) Intro Post Follow-up with financials Beaver Coal Co. (BVERS) Network-1 Technologies (NTIP) Mirriad Advertising (LON: MIRI) Intro Post Follow-up Hemagen (HMGN) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with David Flood of ElementaryValue.com The full show notes for this episode are available at https://www.diyinvesting.org/Episode48 Part 1: David Flood's Investing Process How have you developed as an investor over time? David Flood's Investing Process: Basket of Stocks (20-30+ positions - 2.5-5% each) Overlooked stocks (Low liquidity, sub $10 million market cap) Deep Value Price charts to identify stocks at all-time lows and long-term base Investing in Net-Nets vs Nano-Cap Chart-based deep value SEC seeking to ban quotation of Dark Companies Wants to find and own companies no one else has written up Part 2: Example Stocks Pinelawn Cemetary ($PLWN) - Dividend yield of 9-10%, nearly zero liquidity Beaver Coal Co. ($BVERS) - Misunderstood land company 50,000 acres diversified with coal, gas deposits, timberland, log cabins, and mobile home parks Network-1 Technologies ($NTIP) - A net-net with catalyst. Cash bucket patent troll. Mirriad Advertising (LON: $MIRI) - Video insertion tech company partnered with Tencent Hemagen (HMGN) - Market Cap: $155k USD. Dark since 2013.

Mental Models discussed in this podcast: Liquidity Diversification Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Forced Diversification and Illiquid Stocks The full show notes for this episode are available at https://www.diyinvesting.org/Episode47 Illiquid Stocks Offer the chance for higher returns with lower risk Less competition from professional investors Forced Diversification Can be caused by either: Insufficient stock liquidity Insufficient Conviction in High-Quality Ideas Don't dilute your returns with low-quality ideas held in too large of a position size My goal: Hold 5 stocks at 20% each. Currently, I am unable to achieve this goal because I do not have five ideas that are good enough to be worthy of a 20% position. Summary Illiquid stocks offer substantial opportunity, but can also lead to an inability to purchase as many shares as you would like. This situation, along with a lack of good ideas, can lead you to rationally diversifying your portfolio more than intended. Cash has a high opportunity cost, so it is okay to build small positions in companies that are still high quality, but may not currently trade at wonderful prices. However, stick to your strategy and don't build full positions in companies if they do not meet both your quality and price standards.

Mental Models discussed in this podcast: 2nd-order effects Price Competition Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Broker Price Wars The full show notes for this episode are available at https://www.diyinvesting.org/Episode46 Major Online Brokers eliminated commissions on Stock Trades: Interactive Brokers (IBKR) - On September 26th announced IBKR Lite, with unlimited free trades on United States exchange-listed stocks and ETFs. Charles Schwab (SCHW) - Effective October 7th, Schwab eliminated commissions for stocks, ETFs, and options on U.S. and Canadian exchanges. TD Ameritrade (AMTD) - Effective October 3rd, TD Ameritrade eliminated commissions for stocks, ETFs, and options on U.S. and Canadian exchanges. E-Trade (ETFC) - Effective October 7th, E-Trade eliminated retail commissions on U.S. listed stock, ETF, and option trades. Fidelity (Private) - Effective October 10th, Fidelity eliminated retail commissions on U.S. listed stock, ETF, and option trades. [Not announced prior to the recording] Robinhood: The beginning of the end Popular with young investors (Millenials) Free trading - announced in 2013 as a startup Receives payments for order flow 2nd-order effects The potential demise of the paid index fund Why pay a non-zero management fee, when you can replicate the entire index for free? Fidelity has already shown this with zero-fee index funds. Higher returns for investors all-else equal If you don't change your trading behavior, your returns should rise with this change. You have lower expenses but the same gross return. Your net return should be higher. Changing behavior that promotes more frequent trading. (Could be a major negative) Changing behavior that increases the number of investors and the amount they invest Leading to lower returns in the aggregate as more money chases the same number of assets. How do brokers make money? Robinhood makes money through order flow Brokers also earn money through: Spread between cash interest paid and earned by the broker to investors Internal ETFs and Mutual Funds Asset Management Fees Summary The end game has begun in the brokerage price wars. We have reached the zero bound in terms of commissions now at $0 for US and Canadian exchanges. This will have a major impact on the accessibility of investing and will certainly change the recommendations I have made in the past to new investors.

How to connect with Geoff Gannon Follow his work on Twitter: @FocusedCompound Managed by Geoff's partner Andrew Kuhn Check out his website: FocusedCompounding.com Weekly Email and Watchlist Listen to his podcast: The Focused Compounding Podcast Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with Geoff Gannon of Focused Compounding Capital Management The full show notes for this episode are available at https://www.diyinvesting.org/Episode45 Part 1: Background and Geoff's Investing Process How have you developed as an investor over time? Willow Oak Partnership - Hedge Fund Launch Geoff Gannon's Investing Process: Concentrated (5 positions - 20% each) Overlooked stocks (Low liquidity, low beta) High Quality & Value Focus What to look for in corporate management Does selling stocks add value? Village Supermarket (VLGEA), Activision (ATVI), Coinstar (now private) Part 2: Example Investments - NACCO ($NC) Up 90% YTD (as of October 3rd, 2019) Finding value during spin-offs How to earn infinite returns on capital while mining coal Part 3: Stock Talk - Karelia Tobacco (KARE.AT), Nekkar (NKR), Truxton Trust (TRUX)

Mental Models discussed in this podcast: Credit Leverage Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Bank Investing The full show notes for this episode are available at https://www.diyinvesting.org/Episode44 Four Types of Banks for discussion: Wells Fargo (WFC) - National and Global Bank (ROE about 13%) Frost Bank (CFR) - Regional bank focused solely on Texas (ROE about 13%) Ally Bank (ALLY) - Online-only bank (ROE about 12%) Discover Financial (DFS) - Niche bank focused on credit cards (ROE about 26%) The Business Model of Credit Card Companies Take in deposits and then make loans on those deposits A highly leveraged business model Leverage is your enemy Leverage is your friend Two ways to make money: Bring in deposits at low cost Make loans at high returns Quality of the business: Driven by two factors: Deposit retention Cost of deposits Infinite durability - there will always be a need for banking services High switching costs Potential Threats The high number of competitors Low-interest rates Competition on rates paid for deposits Liquidity crisis - see 2009 financial crisis Making bad loans - see 2009 financial crisis Too much leverage - see 2009 financial crisis Summary Investing in banks is an attractive proposition. However, banks also come with major risks. Even your most average bank operates at a very high rate of leverage. Leverage can be both a curse and a blessing. Unfortunately, you will have to do your research on each individual bank to determine how their leverage is being used.

Mental Models discussed in this podcast: Credit Rent-Seeking Networking Effects Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Credit Card Company Investing The full show notes for this episode are available at https://www.diyinvesting.org/Episode43 Four Major Credit Card Companies Visa (V) - payment processor Mastercard (MA) - payment processor American Express (AXP) - payment processor and bank (high-end focus) Discover Financial (DFS) - payment processor and bank The Business Model of Credit Card Companies Take a cut of all transactions on the payment network Credit risk vs no credit risk Payment processor Extremely valuable service to the marketplace Quality of the business: Extremely high for Visa and Mastercard Quite high for American Express and Discover as well Automatically inflation-adjusted sales growth Potential Threats Overvaluation (particularly for Visa and Mastercard) New payment mechanisms such as digital currency like bitcoin A resurgence in cash (unlikely) Summary Investing in credit card companies is an extremely attractive proposition. They are some of the highest quality companies in the world with clear inflation-adjusted growth. References https://en.wikipedia.org/wiki/Card_scheme

Mental Models discussed in this podcast: Tax Shelters Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. How to invest in an HSA - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode42 What is a Health Savings Account or HSA? High Deductible Health Plan Definition: Minimum annual deductible of $1,350 (single) or $2,700 (family) based on 2019 requirements Maximum out-of-pocket expenses of $6,750 (single) or $13,500 (family) based on 2019 requirements Contribution Limits: Individuals = $3,500 per year Family = $7,000 per year HSAs or Health Savings Accounts are tax shelters designed for maximum benefits when used to cover medical expenses. These limits and requirements can change on an annual basis. Health Savings Accounts are the best tax shelter for employees in the United States of America Triple Tax Savings: Up-front tax deduction (Traditional IRA benefit) Tax-deferred growth (Tradition and Roth IRA benefit) Tax-exempt withdrawals (Roth IRA style benefit) Only when used for qualified medical expenses The only tax shelter that avoids payroll taxes (Social Security and Medicare) Equivalent to 7.65% for individuals and 15.3% for self-employed workers. Must use paycheck withholding for deposits Documentation Management is critical for HSAs You will want a detailed set of documentation for each of your medical expenses. I use a spreadsheet to collect a master data sheet to track ongoing and past expenses since I opened my HSA. I also keep scanned copies of my Explanation of Benefits (EOB), Invoice, and payment receipts for each medical expense. I make no guarantees that this is sufficient documentation. Consult a tax lawyer or CPA. Cash Buffer Planning Have a cash buffer of at least 1 full year of "maximum out of pocket expenses" as defined by your health insurance plan before investing your HSA savings. This cash buffer allows you to weather any volatility in the portfolio. An even better buffer would be 2 full years of "maximum out of pocket expenses" because this prevents the problem of a December injury or illness running into January and maxing out two years worth of health expenses. Maintain this cash buffer throughout the investing process Consider avoiding illiquid stocks While I normally find illiquid stocks to offer increased opportunity, you should consider carefully the additional risks this involves for HSA based investing. I place my highest liquidity stocks in my HSA, but otherwise, manage them like a traditional or Roth IRA in terms of stock selection. Summary A health savings account is the best tax-advantaged account currently available for workers in the United States. Thus, it is important to have a plan and understanding of how to invest your HSA money and maximize the benefits of this unique tax shelter. References https://www.irs.gov/irb/2019-22_IRB#REV-PROC-2019-25 https://www.forbes.com/sites/ashleaebeling/2019/05/29/irs-announces-2020-health-savings-account-limits/#284466d43f3c http://www.hsacenter.com/how-does-an-hsa-work/2019-hsa-contribution-limits/

How to connect with The Science of Hitting: Follow him Twitter: https://twitter.com/TSOH_Investing Read his articles on GuruFocus: GuruFocus - Author: The Science of Hitting RSS Feed Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Interview with The Science of Hitting The full show notes for this episode are available at https://www.diyinvesting.org/Episode41 Part 1: Background and Investing Process Investing Background Science of Hitting's Investing Process Portfolio Management and Position Sizing Evaluating Corporate Management Capital Allocation Advantages and Disadvantages of being a DIY Investor Investing Mistakes and how to avoid them How to judge your investment success Part 2: Example Investment - Microsoft (MSFT) Self-written Bio: "I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification." - Science of Hitting (GuruFocus)

Mental Models discussed in this podcast: Leverage Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Should you invest in Private Prisons? - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode40 What is averaging down? Averaging down is the process of buying additional shares of stock as the stock price declines. This lowers your average price of acquisition for a stock. The last time I discussed investment rules was about lessons learned from my investment in GameStop. Today, we focus on new lessons learned from other people's experience: In particular, Bill Miller and the lessons learned from him by John Hempton at Bronte Capital. Portfolio Management Cheaper is not always better when it comes to portfolio management Three new investment rules Do not average down on a highly leveraged business model. Do not average down on an operationally leveraged business that is declining Do not overage down where the primary risk is obsolescence. 90% decline vs 95% decline A stock that is down 95% is not substantially better than a stock down 90%. However, they may appear similar when superficially compared. Yet, the additional 50% decline needed to reach 95%, doesn't necessarily equate to a bargain. Always avoid going back to zero Bankruptcy risk is the primary concern that you are trying to avoid with these new investing rules. Leveraged companies, in particular, have a higher than average bankruptcy risk. Summary Cheaper is not always better when it comes to portfolio management. Once you have hit your investment allocation for a position it can be a mistake to throw good money after bad. Assuming your investment analysis is correct, you will still end up making money. Yet if you are wrong, you will exasperate a bad situation by averaging down on a losing leveraged position. References Bronte Capital: When do you average down? A full list of my investing rules available on DIYInvesting.org

Mental Models discussed in this podcast: Mr. Market Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Should you invest in Private Prisons? - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode39 Expectations Investing Investing involves evaluating current and future business performance. The greatest returns are often made when two things are true: Your expectations of future business performance differ from market expectations You are correct This second point cannot be understated enough. Contrarian alone is not a useful strategy Mr. Market is Vague Often the market is unclear on what exactly it wants the business to do or what standard management needs to meet to be considered a positive performer. Mr. Market is fickle Expectations can change quickly, often as quickly as an analyst report or price target revision Mr. Market is short-term You can win with a longer time horizon Conviction is Critical You must be confident and specific about what your expectations are The market will challenge your conviction Without conviction, even your best ideas are unlikely to make you money. If you know what you are expecting, and management continues to perform according to your expectations, then ignore how the market chooses to respond. You can't control the market, you can only control your own actions. Example: I was recently challenged by a company I own. A recent earnings release largely met my expectations. However, the market disagreed and the stock price dropped by 40%. Summary Investing expectations drive short-term changes in the market. However, your personal expectations of management and business performance will drive the strength of your conviction in a company. Don't let Mr. Market dictate your investing decisions. Mr. Market's price offers should only ever be seen as an opportunity, not a necessity to act.

Mental Models discussed in this podcast: Blood in the Streets Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Should you invest in Private Prisons? - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode38 Blood in the Streets - Mental Model The best time to invest is often when an industry is most hated. The private prison industry is a current example of an industry with large amounts of negative news coverage leading to lower stock prices. Previously, I took advantage of a similar situation in 2015/2016 during the oil price crash. At that time, the oil industry was similarly hated. Major Companies in the Private Prison Industry Core Civic The GEO Group Both offer dividend yields exceeding 10% Reasons for the current industry hate Political headwinds Alleged problems at specific companies Moral reasons Summary Opportunity in the stock market does not often coincide with the hot industry of the day. Instead, you are most likely to find value investments when broad industries or individual companies suffer from temporary hatred and disdain. The private industry currently fits the bill. The companies in this industry may not be a good investment or companies that you even want to invest in. However, the private prison industry currently offers a good example of the sorts of occasions where value investing tends to shine.