Clay Finck (03:07):

After this spectacular run, the fund had an abysmal return of minus 55% in 2008 during the great financial crisis. His funds assets on our management dropped from $77 billion to $800 million, as investors were just pulling all of their money out of the fund. Investors were leaving. He had to lay off 100 employees and he was receiving margin calls, and he was forced to sell all these positions because he was taking out loans against his positions. And he went through this extraordinary amount of stress as he had to let people go from the company, and many people were losing money in his funds. But he didn’t give up. His approach through all of this was that you can’t control what happens to you, but you can control your attitude and how you react to whatever misfortune comes your way. Having gone through this terrible experience of being shamed in the press and ridiculed on social media, he focused on the things he could control going forward as, the past just simply can’t be changed.

Clay Finck (04:05):

And that attitude paid off huge for him. He was certain that a strategy of buying stocks well below what they’re worth will continue working for him. Then his flagship mutual fund was in the top 1% of all mutual funds in the US over the next decade. What’s even more impressive to me about Bill Miller’s track record is that he bought the Amazon IPO in 1997 at a share price split adjusted of $1.50. And he’s essentially only added to that position as Amazon’s stock crashed over 90% after the tech bubble, and crashed over 60% during the great financial crisis. Miller believes that today he is the largest shareholder of Amazon outside of Jeff Bezos and his ex-wife, MacKenzie Scott. Another impressive bet that Bill Miller has made is buying Bitcoin around $100 or $200 per coin back in 2013. Assuming that he bought at $100 per coin in 2013, and he held to today, that’s a total return of over 29,000% today.

Clay Finck (05:07):

The majority of Bill Miller’s net worth sits in his holdings in Amazon and Bitcoin. Just thinking about the returns on these two investments is just simply mind blowing. And this isn’t me trying to say that you should go out and buy Amazon stock or buy Bitcoin. The point I want to make is that I can learn from these successful investors and try to apply some of the things they’ve learned in their own life and how they’ve adjusted their investing strategy. They share a lot of their ideas, and many of their investments are public information. There’s a site called Dataram. And on this site, there’s a super investors tab that shows the portfolios of many of the best investors in the world, such as Bill Miller, Charlie Munger, Warren Buffet, Tom Gayner, Howard Marks, and many others. Even if I’m able to achieve a fraction of some of the success of some of these great investors, that can bring me to a really good place over a long enough time horizon. I can go to a site like Dataram and see that a lot of these investors own a specific company.

Clay Finck (06:06):

And again, that’s not to say I should buy that specific company myself, but it might be worth looking into at the right price. Over the years, I’ve personally made a number of good investments, but that hasn’t come without my fair share of mistakes. I would say I got lucky and bought Apple stock back in 2015 when I was in college, and that proved to be a very good investment. Looking back at my investment in college at the time, I would call that a very lucky bet. But I think that as I learned more about the company over the years and how I should be investing and listening to TIP shows, I think I figured out in the years following that it was wise to hold onto that position. Also early on, I invested in an oil drilling company where I was essentially trying to bet on the price of oil. That ended up being an abysmal investment as I essentially lost 100% of my money.

Clay Finck (06:53):

But what I learned from these investments is that my winners can more than make up for my losers. Since 2015, my position on Apple is up roughly five times, while my investment in the oil company is down only what I invested. So, $1,000 investment in Apple turns into roughly $5,000, not counting any dividends paid out over that time, while the oil investment turned to nothing. And I still come out ahead of the S$P 500, just looking at those two investments. Listening to TIP, they also brought me around to the idea of Bitcoin in 2020. Initially I was pretty skeptical of Bitcoin like most people are, but after seeing the fiscal response of the government after COVID and learning as much as I could about Bitcoin, I ended up taking a position as I thought it was an investment that could produce asymmetric returns.

Clay Finck (07:40):

The idea of asymmetric returns is that your downside is limited to what you have invested, but your upside is unlimited. When Preston Page initially pitched Bitcoin on the mastermind episode in the first half of 2020, Bitcoin was trading at around $7,000. Like I said before, your downside is limited to what you have invested at the time, assuming you aren’t taking on any leverage. And had you bought Bitcoin then, you’d be up over four times your money in just two years. And I think that’s what many great investors are doing when they’re choosing their investments. They think about what the potential upside is and what the potential downside is on their investments, and then kind of assigning probabilities to those outcomes. On William Green’s recent episode with Bill Miller, Miller mentioned that he thinks Amazon is currently a great investment. It’s market cap currently sits around $1 trillion, and they have many business units that are growing very fast with a very long runway ahead.

Clay Finck (08:32):

And Amazon’s at a size where there’s no way that they’re going to be filing for bankruptcy. So, there is very limited downside, but there’s a lot of upside with their fast growing business units like their online store, their advertising unit, AWS, and a number of others. If you’re interested in learning more about Amazon, I recommend checking out our Millennial Investing episode 165 with John Huber. John recently made Amazon the largest position in his fund, and we chat about why he did that during our conversation. Another reason I enjoy following the markets is because sometimes the market can present some fantastic buying opportunities. Benjamin Graham has popularized this idea of Mr. Market. Mr. Market is essentially this guy that shows up to your doorstep with a list of stocks trading at various prices. Using Amazon as an example, today Amazon trades around $2,200 per share. You might decide that you’d like to own some Amazon, so you buy some today.

Clay Finck (09:28):

Then tomorrow, Mr. Market will show up to your doorstep again and offer you a different price. That could be $2,300. And you decide that you don’t want to purchase at that price. Some days, Mr. Market will offer what you decide to be a favorable price, and other days he might offer an unfavorable price. And you don’t have any obligation to buy it. You could just be patient and wait for a really good opportunity to come along. This idea of Mr. Market is exactly how the stock market works. A lot of times markets are efficient and offer what the fair value is of the company, but sometimes Mr. Market offers you a really good deal. Hindsight’s 2020, but we could look back at what happened to a company like Google when the COVID-19 pandemic hit. Google stock was trading at around $1,500 per share in February, 2020, just prior to the liquidity shock in the markets as a result of COVID.

Clay Finck (10:17):

Just one month later, Google stock dropped to over $1,000 per share, which is over a 30% discount from the month prior. Do you think that a company like Google fundamentally changed that much from February to March? I would say definitely not. Fundamentally it’s really about the same. What changed was people’s perception of the company and their perception of the market overall. That led to a change in the stock price. Some investors needed cash, so they had to sell their shares. Some were worried about the pandemic and wanted to get out of the markets. As someone who believes Google’s business will continue to grow over the long term due to their competitive moat, I think buying Google was a great opportunity in hindsight, which is easy to say now. Since then Google stock has rallied significantly as they actually ended up benefiting from the pandemic, and a shift to more things moving online. Their stock peaked around $3,000 per share in February, 2022, and today sits at around $2,300.

Clay Finck (11:17):

So again, Google stock has had a pullback of over 20% this time. There is uncertainty around whether Google’s boost and earnings is sustainable, but I believe that Google today is a buying opportunity for long term investors. If you’d like to learn more about Google stock, I’d recommend checking out Millennial Investing episode with Richard Jark back on episode 173. So, again, back to that idea of Mr. Market. When everyone is excited about the stock market, there’s going to be a lot of buyers. He will often give you a really high price when that happens. When there aren’t many buyers at all, he might offer you a really low price relative to the actual value of what you think the business is worth. And I think the best investors are really good at taking advantage of those opportunities, where the market happens to offer a big discount on quality companies.

Clay Finck (12:07):

A lot of people are oftentimes disappointed when the market drops because their portfolios are going down. But for younger investors that are in it for a long time horizon, drops in the prices of the assets you want to own are actually a good thing. Psychologically, it’s a really hard thing to do, but you should be excited when you see the price of a quality company go down 30, 40, or 50%, as long as you know and understand the true value of that company really well. Things like having a strong moat and strong free cash flows, help ensure that you are buying a quality business and you’re not making a mistake of catching a falling knife. This is related to Benjamin Graham’s quote that the market is a voting machine in the short run and a weighing machine in the long run. The value of a business can change drastically from day to day or month to month.

Clay Finck (12:53):

But over the long run, what really matters is how the business is actually performing as far as their execution, and their revenue growth and their earnings over time. One theory that is taught in schools and colleges is the efficient market hypothesis. This hypothesis essentially says that all of the markets have priced in all publicly available information. So, when you say you’re going to buy a specific company because they’re currently growing at 100% per year, well, the market already knows that the company has grown at that rate. So, you don’t have any information that the market doesn’t already have. Personally, I would say that markets are not 100% efficient. I’ll bring up Amazon again. This is a company that has gone through many substantial drawdowns, and it reminds me of an interview that Jeff Bezos did. He mentioned that the stock and the actual company are two different things.

Clay Finck (13:43):

During the tech crash, Amazon stock crashed by 90%, but Bezos said during that time, he looked at the actual metrics of his business and every single metric during that time, that actually mattered for the value of the business, was improving. Whether it was number of customers, profit per unit, they were all improving while the stock was actually going down and just crashing. I think one advantage that individual investors can have is that they can invest with a much longer time horizon than many other investors. Many retail investors are very emotional and tend to buy when stocks are hot, and sell when thanks cool off, and many investment professionals are moving in and out of stocks to try and target their short term results. When I buy an individual stock, I’m not so much worried about how they will do next quarter or next year. I’m investing because I believe in the management’s ability to potentially take the company and grow it substantially over the next 10 to 20 years. Jeff Bezos has said that the most recent quarter already happened years ago.

Clay Finck (14:45):

And the work Amazon is doing today is for the quarter five years from now. And that’s the type of management team we want to look for. The team that thinks long term in a world that is very short term minded. So, individual investors have time on their side relative to many other investors, in my opinion. In deciding whether you yourself should invest in individual stocks, I’d recommend starting out by reading a few books about individual stock investing and listening to podcasts like the one you’re listening to now. I’ll be sure to link a few books in the show notes that I think will be a really good starting point for anyone that’s interested. You could start by only investing a small percentage of your portfolio in individual stocks, say 10% or less. Also, you should be aware that owning individual companies is going to take a lot of work just to find the right companies you want to invest in.

Clay Finck (15:34):

And then there’s additional time in managing your portfolio going forward. If you don’t want to even bother with putting in the extra time for greater upside potential, then you’re most likely better off just sticking to basic index funds. Here are some key tips I would recommend for people that are interested in buying individual stocks. First, only invest in what you understand. There are a ton of investments out there that I flat out don’t understand, and that’s okay. You only have to know a few things very well, and you could still turn out to be a really good investor. Investing in what you understand is what Buffet calls staying within your circle of competence. You know the things that you know really well, and you don’t have to invest in anything outside of that. And you definitely shouldn’t buy something just because somebody else is buying it or somebody else told you to buy it.

Clay Finck (16:24):

You’ll want to read through the company’s annual report and 10-Q, understand the risks, understand the expected future growth of that company and all of that fun stuff we talk about on the show. Just because someone else is making a lot of money on a company doesn’t mean you should buy it. So, stick with what you know really well. Second, I would recommend to invest with a long time horizon. Nowadays, markets can be very volatile. So, when you buy a stock, you might be getting in at a great price, but it still might fall significantly from where you bought it at. I’d say that for any individual stock, you need to be prepared for that stock to fall 50% from where you bought it at. And understand that when you’re buying individual stocks, you’re going to need to have that long term time horizon, so you can weather through that volatility.

Clay Finck (17:09):

My third tip, it’s probably wise when you’re starting out with individual stocks to start with the large well established companies, like many of the companies that are in the S&P 500. You might start out with well known brands like Apple, Google, Microsoft, or Starbucks. When you start out with these large, very well known established brands, you’re decreasing your risk when comparing to many of the other companies in the markets that aren’t as big or aren’t as well established. These larger brands tend to kick off free cash flows and provide stability in the value of the business. Also, these types of companies are oftentimes one of the leaders in their respective industry. My fourth tip, one of the principles of value investing is recognizing that when you buy an individual stock, you’re actually buying ownership in a business. You’re not buying a ticker on a screen.

Clay Finck (18:01):

You’re not buying something that you think will double overnight because of some technical indicator. You’re buying a share of a company with employees putting in the work every day. Remember that you’re wanting to buy a business that produces free cash flows that are either reinvested back into the business or returned back to shareholders. And I think that’s just something that’s really important to keep in mind when you’re analyzing and choosing stocks to invest in. My fifth tip, as a value investor, you want to buy something for less than it’s worth. So, first you’re going to need to determine a conservative valuation of the company. And second, you’re going to have to wait until it’s training at a price that is attractive to you. If you aren’t able to figure out how to value a company, then you might not be quite prepared to purchase the individual stocks.

Clay Finck (18:45):

There are other good rules of thumb, such as finding quality management and ensuring the company has a strong, competitive advantage. But I would say these five items are a great starting point. Investing in what you understand, investing with a long time horizon, starting with those well established companies, remembering that when you buy a stock, you’re actually buying a real ownership and a business. And fifth, you’re going to have to be able to determine a fair price for that stock. All right. That’s all I had for today’s episode. If you have any questions related to anything I discussed during this episode, feel free to reach out to me. My email is clay@theinvestorspodcast.com, and on Twitter, my username is @clay_finck. That’s @C-L-A-Y_F-I-N-C-K. I’ll be sure to get back to you when I have a chance, and I’d be happy to try to help you guys out. Thanks for tuning in.

Outro (19:37):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to the investorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.