[00:02:33] Shawn O’Malley: Hey guys, today I’ve got my colleagues, Clay Finck and Kyle Grieve with me from our We Study Billionaires podcast. Clay and Kyle are truly some of the most thoughtful investors I know, and I’ve learned a ton about investing from them directly and indirectly. Both of them manage their own portfolio of individual stocks and tend to think very long term after having studied and met with a range of iconic investors, including people like Adam Seessel, Chuck Akre, Chris Mayer, Aswath Damodaran, Jeremy Grantham, Ian Cassel, and a whole bunch more.

[00:03:02] Shawn O’Malley: Clay and Kyle have also both hosted this show, so you might recognize them. But with that said, welcome to the show, guys. Thanks Happy to be here. Thanks for having us. Since you’ve been with the investors podcast network, the longest, I’d like to start with you first, Clay. You started hosting our millennial investing podcast in the fall of 2021.

[00:03:19] Shawn O’Malley: So I’d like to ask what has changed the most about you in that time? I know when we first met in person, it was actually in Miami at a Bitcoin conference. We’ve also seen each other in Omaha for Berkshire Hathaway shareholder meetings and roamed Wall Street together too. And there’s a real contrast between the type of person who obviously visits Omaha, Wall Street, and Miami.

[00:03:38] Shawn O’Malley: And I find that interesting. You are sort of all of them in one. And again, that’s really fascinating to me. So yeah, tell me how has the Clay Finck I’m talking to now evolved as an investor from the version of you that first hosted this podcast more than three years ago?

[00:03:53] Clay Finck: Yeah, it’s a fun question because it’s been a lot of fun, been in quite a journey as I’m sure it has with you, Sean, and I think the better question might be.

[00:04:01] Clay Finck: Just what hasn’t changed since the fall of 21, because just so much has changed for me since then. And it’s just not just from an investing standpoint either. So in the value investing community and just here at TIP in general, what we really try and do is just learn something every day. And when you talk and interact with so many smart people, you just really can’t help, but learn hopefully something over time and then just make a ton of mistakes and learn from those as well.

[00:04:26] Clay Finck: I’d say from an investment standpoint, one of the biggest things that changed for me is really just honing in my investing style. So when I first joined TIP, most of my portfolio was in index funds. And I really use the opportunity as a host of millennial investing to interview all sorts of different types of investors.

[00:04:46] Clay Finck: And then I would look at their investing styles, read up on books on Buffett and others, and just see for myself what really works in markets. And then over time, I just sort of learned that so many investors, there’s all different types of investors out there. A lot of them can talk the talk, but not too many can actually walk the walk.

[00:05:04] Clay Finck: A lot of people can restate a lot of what Buffett has said, but very few can actually implement his teachings into their own business and their own fund. And you just sort of realize that a lot of the finance industry is just really about accumulating assets and not necessarily achieving the best returns.

[00:05:20] Clay Finck: So part of our job, I think here at TIP is just to help kind of sift through that and help people recognize and kind of shine a light on those that that can walk the walk. So the first thing I would say about my investment style where I’ve landed today so as of the time we’re recording here, I own eight individual stocks, and then I’ve owned Bitcoin since 2019, and I largely don’t discuss that on the podcast, so I’ll focus more of this on, on the individual stock side.

[00:05:46] Clay Finck: So my approach to stock picking is highly influenced by, Okay. Three people that I would say all have fairly similar approaches to stock investing. So that’s Chris Mayer, Charlie Munger, and Nick sleep. When I think about some of the things I’ve learned with regards to stock investing, I think initially I was really drawn to just focus on the numbers.

[00:06:05] Clay Finck: So like. A lot of my life. I’ve just like loved math. I’ve always loved numbers. And that’s part of what drew me into investing because it seemed to me that it’s just all numbers game, which in some ways it is, but I just really gained an appreciation for how much the numbers are ultimately an outcome of all these qualitative things, these things that have nothing to do with numbers to some extent.

[00:06:26] Clay Finck: So I was listening to a recent podcast with Chris Mayer and he highlighted the importance of skin in the game. And I’ve just seen firsthand and working with tip, the importance of incentives, the importance of skin in the game, and just being in an environment that incentivizes the outcome that you desire.

[00:06:44] Clay Finck: So all my holdings have high insider ownership and reasonable levels of compensation to help ensure that they’re incentivized to deliver the types of returns I’m looking to get as a shareholder. And Kyle and I have said this a lot on the show, but the focus on quality is just essential for my approach.

[00:07:01] Clay Finck: When you look at the numbers of some of these businesses, they might not necessarily look like value investments, but hopefully down the line, the market realizes just how good these businesses are and the quality itself, hopefully provides a margin of safety in the process. And I mentioned that episode with Chris Mayer and he talked about how value investors can find comfort in numbers.

[00:07:21] Clay Finck: And I, I just love that comment he made, value investors, they see a number, they see a low price to book, a low PE multiple, and they just sort of get anchored in that and find comfort in that number. And I would argue that approach can sacrifice quality. And it can filter out some of the best businesses to own.

[00:07:37] Clay Finck: So when paying up for quality, you have to accept that there’s just this level of uncertainty that maybe it’s just this qualitative aspect that you can’t really just point to, you can’t point to a number of where the price books less than one or whatnot. So, I’d say the last point I would highlight is that ideally, I’ll rarely sell any of these businesses if I can help it, which is sort of based on this belief that.

[00:07:59] Clay Finck: One, I don’t want to interrupt the compounding process and underestimate a great business’s ability to outperform over long periods of time. And in the ideal scenario, hopefully I’m right about the business I’m investing in and I’m able to own it for 10 plus years. I’m reminded of a recent interview I did with Professor Hendrick Bessembinder.

[00:08:18] Clay Finck: He really highlighted the importance of long term investing in these rare businesses that can I’ll perform for long periods and not interrupt that process. So that mayor interview also talked a bit about intrinsic value and many investors biggest mistake is selling a great company too early because they feel like they have a sense of what they know the intrinsic value is.

[00:08:37] Clay Finck: And then they come to realize. This business could run for a lot longer than I thought it could. So, that’s something I almost see it as taking the possibility of making that mistake out of my process because intrinsic value, it’s a very tricky thing to estimate. And I’m certainly no expert relative to some of the people I’ve talked to on the show with regards to that.

[00:08:55] Clay Finck: I feel like I can get generally right, but you don’t want to be precisely wrong when it comes to that. And I also just try and remind myself how short term the market can be. So it’s natural for a lot of investors to look at. This year’s earnings, next year’s earnings, and I don’t think too many people are willing to look out five, ten years on where a business might be that far out into the future. So certainly no easy tasks to know what businesses are going to do well over that time period, but it’s something I’m striving for.

[00:09:22] Shawn O’Malley: Yeah, no, I really love following your progression over the last three years because just as I listen to you speak. Some ways you’re so much more confident about what you know matters.

[00:09:31] Shawn O’Malley: And in other ways, you’re more humble about what you don’t know. And so to me, that’s, that’s the mark of savvy investor and somebody, I think you’d probably say you’re allowed to learn to still, but he’s definitely come a long way. And I’m still on that journey myself. And I know you’ve spoken with so many talented investors over the years, but I want to just go ahead and play a clip from.

[00:09:49] Shawn O’Malley: What I know is one of your favorite interviews. And that was a conversation with Scott Nations in 2022 on the history of stock market bubbles and crashes and what to do as an anxious investor. So let’s take a listen.

[00:10:01] Clay Finck: My final question for you is, we’ve studied all these bubbles in your book, the South sea bubble.

[00:10:07] Clay Finck: The tech bubble and the great financial crisis. And it’s been said for many years that we’re in an everything bubble driven by in many ways, the federal reserve and the liquidity they’ve added into the system. And it’s led to the rise of many asset classes, stocks, real estate, even crypto. Do you believe that this narrative of the everything bubble is true?

[00:10:29] Clay Finck: And if so, is there anything we can really do about it to help protect against the next big crash that might be coming?

[00:10:38] Scott Nations: Clay, listeners are going to wish you, we had done this in January since we’re now in a, in a bear market. The SMP is down more than has been down more than 20 percent on a closing basis.

[00:10:48] Scott Nations: Here’s what to do. And this is going to, people are going to find this. This is not going to be the advice that people expected. I think here’s what to do. Invest, continue to invest. Don’t stop investing. Investing is the only thing I can think of. The only human realm where we’re unhappy when we’re getting a discount.

[00:11:09] Scott Nations: Well, if you have a long term, a reasonably long time horizon, 10 years, then you, you would rather pay 20 percent less today than you did at the start of the year. So invest, continue to invest. Don’t stop investing. That’s what you can do. One of my favorite biases that I talk about in the book is called hindsight bias.

[00:11:32] Scott Nations: And it’s this, it’s this tendency for people to look back and convince themselves that what happened was so obvious in retrospect that they saw it coming. And Professor Schiller at Yale did some wonderful research right after the crash of 1987. In an analog world, he sent out postcards to a bunch of investors and said, did you see the crash coming?

[00:11:54] Scott Nations: And about a third of them, almost 40 percent of them said yes. And then he asked for their trading records. Well, it turns out that 3 percent of them, 3%, which would be about the random number you would expect for a group, about 3 percent had actually done something in advance of the crash. The point is that a third of the people that he talked to were fooling themselves.

[00:12:17] Scott Nations: Okay, we fool ourselves. Clay, what’s that mean? It means that the next time we’re overconfident about our ability to see a crash coming and to get out and to front run it and to save ourselves. Well, it is purely overconfidence. We have fooled ourselves through hindsight bias. Again, the secret to making money in the stock market is to not get scared out of it.

[00:12:40] Scott Nations: So invest, continue to invest and kind of, if you can trick yourself into thinking, wow, I’m getting a 20 percent discount right now to where it was at the start of the year, then bravo, you are on your way to being a great investor.

[00:12:54] Shawn O’Malley: I remember listening to that interview at the time and two years later, I want to ask you firstly, whether you still think we are in a so called everything bubble. And secondly, because it relates to worrying about big bubbles, how do you handle your nerves as an investor, especially since you have a fairly concentrated portfolio now?

[00:13:12] Clay Finck: Yeah. So first thanks for playing that clip. It’s I know most of us hosts don’t really like listening to ourselves, but it’s even more painful to listen from like two or three, two or three years back.

[00:13:21] Clay Finck: But yeah, are we in an everything bubble? How do I think about that? The truth is, I just don’t know. I’ve learned as a host that uncertainty is always just a fundamental part of investing. And People always want to know what’s going to happen and, and it’s why the big media outlets are going to always deliver a message where the person on the show is just absolutely certain we’re going to have a stock market melt up, or absolutely certain we’re going to have the biggest crash since the 1930s.

[00:13:46] Clay Finck: And they know they won’t get viewers if they bring someone like me on who just says, no one knows. No one knows what’s going to happen. But some people claim they knew after it does happen. So the other thing about bubbles is that certain stocks could be in a massive bubble and then other stocks could be trading at a massive discount.

[00:14:03] Clay Finck: So I try and be careful about painting these just broad strokes around the market because the underlying companies within each market can just vary so drastically that it can almost seem like nonsense to bucket them together and just put them in this, under this label, essentially. And with regards to like dealing with nerves and managing a concentrated portfolio, it’s just nearly certain to occasionally deliver just painful drawdowns over an investing lifetime.

[00:14:29] Clay Finck: I think even a diversified portfolio is going to deliver just painful drawdowns. So Some things that help for me personally is just focus on the things that I can control. So, I think about having a good savings rate. So, if I am consistently saving each month, then I can add to positions when the overall market is down substantially and, better prices are available.

[00:14:50] Clay Finck: I think about having an emergency fund. So should something totally unexpected happen, say lose my primary source of income, or I have a major expense I need to cover, then I don’t need to sell investments at the worst possible time. And what’s also important is just thinking about the underlying businesses and trying, it’s hard not to look at the share prices of what you own, but just try and focus on what is going to drive the success or failure of that investment.

[00:15:15] Clay Finck: So March 2020 spooked a lot of people, liquidity dried up in the market, causing share prices to drop like a rock. And the long term fundamentals of many businesses. We’re largely on chains. Of course, the near term was highly uncertain for essentially every company. But over the long term, it seemed that, a lot of great businesses were going to be just fine.

[00:15:35] Clay Finck: So if we look at just an example, everyone knows Amazon, their stock dropped by 25 percent in a very short time period around March 2020. And it’s yeah. Hard to imagine that the intrinsic value of an amazing business like that would change that much. So an investor, there are a lot of investors think, they don’t want to buy the big market bubble.

[00:15:55] Clay Finck: They don’t want to be the one that buys the top essentially. Well, if you just look at that example with Amazon, if you bought in February 2019 or in March 2020, it might’ve looked like you got a bargain in March 2020, but if either of those investors that is bought and would’ve ended up doing just fine.

[00:16:10] Clay Finck: So I think another big thing that gives me comfort is, I don’t know if too many investors think about this, but I sort of like it for my portfolio is some of the companies I own are positioned to do well, regardless of the market environment. So I think constellation software is a good example. A lot of we study billionaires listeners are probably tired of me mentioning the stock, but During a normal period, I know they’re deploying capital and achieving high rates of return on that capital.

[00:16:35] Clay Finck: And even better when liquidity dries up, when we’re in a crisis, odds are they’re going to be getting even more attractive returns because there’s less buyers and there’s going to be more desperate sellers. So, yeah, that’s, that’s some of the things I think through when thinking about what, what sort of market environment we’re in, how I manage a concentrated portfolio and whatnot.

[00:16:55] Shawn O’Malley: Yeah. I think you make a good case for, I mean, obviously active investing comes with a lot of risks and you hear, we’re all pretty familiar with downsides of it, but one of the, one of the upsides is that you’re more informed about the companies you own. And I think there’s sort of an emotional hedge there.

[00:17:09] Shawn O’Malley: I guess it could work against you too, but you know, in a way there can be an emotional hedge of, I really understand the businesses that I own, I’m less likely to panic. And obviously, there’s that whole component of having money set aside to, so you have an emergency fund, so you’re not inclined to panic.

[00:17:24] Shawn O’Malley: It’s not the end of the world. If you’re 401k or brokerage account or whatever declined 20 or 30 percent in value. But yeah, if you just have some passive index fund, it’s a lot easier to not feel like you know what you own and not know why things are happening. And that’s sort of right conditions to panic, but I don’t want to just keep the spotlight on clay here for, for too long.

[00:17:41] Shawn O’Malley: We have Kyle who is an immense talent and one of those people that really exudes passion, which I think you only need to hear him talk for a few minutes to know that. You really get the impression that he lives and breathes his investments, which I say as a compliment and in the best way, it’s so easy to get distracted today and be able to laser focus on companies.

[00:18:01] Shawn O’Malley: You track is very impressive to me, and it’s even more impressive because you’re not afraid to look for value where no one else is. The types of companies that Kyle invests in are what you might call somewhat obscure from even Polish grocery stores to thermal energy companies. And as I try to construct my own portfolio of stocks, I want to sort of selfishly ask you how you build out yours over time, two weeks after deciding that you wanted to invest in individual stocks. What do you do when you wake up on that day and, and, and the days after that, what, what sort of things were you, you looking for?

[00:18:33] Kyle Grieve: Yeah, I definitely do love obscure businesses and I’d also add the more boring the better, like you of course is the polar supermarket, which I’m sure similar to constellation software.

[00:18:44] Kyle Grieve: A lot of we study billionaire listeners are probably sick of us talking about Dino Polska, but. That’s what they do. It’s a, it’s a nice, simple business and, so it’s unlikely to be disrupted by technology. And then there’s another one I have called Atlas engineered products. And they make trusses out of wood.

[00:19:00] Kyle Grieve: So another very boring industry, but I, I really liked that. And I like the fact that it’s going to be tough for technology to come in and kind of ruin those business models. So in terms of your question, though, I think I’m going to break that down into two separate sections. So the first one is just, what do I do?

[00:19:15] Kyle Grieve: So I generally have a lot of ideas floating around in my, in my brain. I get them from numerous sources. That might be Twitter. That might be Substack. The TIP mastermind community. I get a lot of ideas from there. I mean, then, I’ve made quite a lot of friends as well, just in investing. And the beautiful part about that is that a lot of these people know me pretty well, know me, know what my preferences are, know the types of businesses that I like.

[00:19:40] Kyle Grieve: And so sometimes they’ll send me ideas and, they, they know that it’s something that, Oh, okay. Maybe it’s something that Kyle understands or something that definitely resonates with Kyle. So I get ideas from a lot of different places and I’m very lucky to have so many sources. So once I get an idea, I generally like to do a pretty quick quantitative check just to make sure that the business is profitable.

[00:20:00] Kyle Grieve: If a business isn’t profitable. And unfortunately, a lot of people will share ideas with me and I can just look at their net income if it’s negative, or if they have no cash flows, it’s just, I’m not going to bother spending another second, really on the business. Of course you can, there are businesses like that, that can be wildly successful, but.

[00:20:15] Kyle Grieve: I just don’t bother. So if the business is profitable, I’ll look at a couple of other things. I’ll look at, the historical growth, look at, revenue, net income, earnings per share, free cashflow, stuff like that. I’ll look at the capital efficiency of the business, look at things that, you know, like returns on invested capital returns on equity.

[00:20:32] Kyle Grieve: I’ll look at their cashflow and then also look at their financial health because that’s pretty important to me. I like businesses that I can’t go to zero. And then luckily so far in my investing career, I haven’t had that happen. If that all checks out, I’ll start the due diligence process. So that has a lot of steps to it.

[00:20:47] Kyle Grieve: There’s a whole bunch of different things I do. I’ll, I’ll read analysis from other investors. After that, I’ll read things like 10ks, 10qs, I’ll read letters to shareholders if the CEO writes them, I’ll read and listen to quarterly Q& As, take ton of notes of course, and I’ll read things like proxy statements and stuff like that.

[00:21:06] Kyle Grieve: So, If I go through that and the business still looks interesting, which not a lot of things pass through my filters to this point, then I’ll start really digging in seeing if I know anybody who works in that industry or maybe works for a competitor or just understands the industry better than I do and try to talk to them, ask them questions.

[00:21:25] Kyle Grieve: Then after that, I like to look at competitors, see what they’re doing, see what their numbers are, see why this business might be better or worse or equal. I also like understanding if the manager of the business that I’m looking at, I like to know more about their compensation. If they’re making 10 million a year and everyone else in the industry is making 2 million, well, that’s a pretty big red flag.

[00:21:43] Kyle Grieve: Or maybe, maybe there’s some superstar and maybe there’s a reason, but I think it’s pretty important to understand about the compensation and what they’re also incentivized to do. After that, I, I’ll start looking at my checklist. So I have a checklist. I think it’s somewhere around like 130 items at this point, and it just keeps growing, but I’ll generally try to fill out my checklist and about say 60 to 70 percent before I end up buying.

[00:22:08] Kyle Grieve: I generally will end up writing every single answer to all my checklists at some point, but it might not be during the process because sometimes there’ll be an opportunity that comes up that I might need to kind of hustle because there might be some sort of catalyst. So during this entire process, I haven’t mentioned valuation yet.

[00:22:27] Kyle Grieve: So during this entire process, generally I get an idea, looking at competitors, see what they’re trading for, seeing the quality of the business. Is it really high quality? Does it have really high recurring revenue? Well, great. And then that means it’s probably expensive and it’s a high quality business and the market knows about it, which also means it’s going to be expensive.

[00:22:42] Kyle Grieve: And so at that point, I’ll try to figure out if the investment makes sense, can I actually earn a return? Of course, like Clay said, you can pay pretty high prices for some of these investments. And the traditional value investors probably not going to bother looking at them because they’re just looking for, keys that are less than 10 or Our businesses that are trading at less than book value, but you can find really, really high quality businesses.

[00:23:06] Kyle Grieve: And even though they’re trading at these optically high multiples, they still end up giving a really, really good return. So, yeah, so that’s just to say, it depends. Some businesses deserve to be cheap and some businesses don’t deserve to be cheap. So Once I go through the valuation, I’ll see if the price is above my hurdle rate.

[00:23:25] Kyle Grieve: And if it is then cool, then I’ll start buying it. So my buy process has definitely evolved over the years when I kind of first started. And this was kind of, it’s hard to adjust just from the times that, during COVID you had a lot of businesses that were really interesting and then they would go up in price really, really fast.

[00:23:41] Kyle Grieve: So I kind of got scared to take this kind of slower approach because I’d buy something and then it would, it would like double. In a couple months’ time and I was like, okay, well now I can’t buy it and I have like a tiny position in it So I kind of got used to being like, okay Well, I’m going to do the work and try to ratchet it up to I’m pretty concentrated So I might ratchet up to eight or ten percent like right off the bat But there were some problems in that because I felt like with the more and more experience I got, I understand a business really, really well once I own it.

[00:24:10] Kyle Grieve: And so now I try to just take a one to 3 percent stake. And once I start understanding the business more, I’ll add more. Will that mean I’m, I’m averaging up probably in some, in some cases, but. I think that understanding the business a lot better and averaging up is, is probably just a better strategy, at least for me.

[00:24:28] Kyle Grieve: And then, yeah, so throughout the whole process, I’m trying to find, some of the small nuances and in the business use different mental models to help solve a variety of different questions or problems that I might have on a business. And then as also part of the thinking process, I’ll do destination analysis, which was popularized by someone obviously clay highly respects, which is Nick sleep in case a car from nomad partnerships.

[00:24:49] Kyle Grieve: So if for listeners, I don’t know, destination analysis is, is pretty much where I’m just going to imagine where the business is going to look like in say five to 10 years. And. This definitely requires some honesty because, it’s easy to really just fool yourself into thinking that, what things are going to look like in the future, but, as, as Clay already alluded to, the future is unknown and people who say they know what it’s going to look like are, are usually not being completely honest with themselves.

[00:25:14] Kyle Grieve: So, you have to just admit that. Maybe you understand what it looks like. Maybe you don’t know what it looks like. And so for me, one, one thing that I’ve, I’ve really found powerful is, is being like, okay, well maybe I don’t know what the business looks like in 10 years, but maybe I do know what it looks like in five years.

[00:25:29] Kyle Grieve: And so if I know that at least I know, okay, well in five years’ time, if this business is still doing everything, I want it to do cool, now I can look at it in another five years. But if I look out 10 years and I’m just completely off the mark, well, that might just give me signals to do things that don’t make a lot of sense.

[00:25:46] Kyle Grieve: And then, with another section of my portfolio, I’m it is a little more short term oriented. So in that case, I might just be looking out like two years. And even I’ve noticed with a lot of my businesses that I think I can hold for a long period of time, I still probably have to bring it down to two or three years.

[00:26:00] Kyle Grieve: Cause I feel like I’m a lot more accurate than looking way further out. And then the other thing I also try to do during the destination analysis process is just finding out which KPIs are going to be most important that that business needs to hit in order for me to meet that destination. And then on the other hand, I also like to know what needs to happen for them to not hit those KPIs.

[00:26:21] Kyle Grieve: And then I can actively look for that. So when I actually own the business, I know what to look for to make sure that, okay, are things going right or are things going wrong? And then that can also help improve my decision making. So To answer the other part of your questions of what I’m looking for. So I have two distinct buckets of investments.

[00:26:37] Kyle Grieve: My primary bucket is pretty much probably exactly the same as, as what Clay already mentioned, it’s high quality businesses. So I want businesses, that can reinvest in themselves, that hopefully very high rates return. And hopefully for multiple years into the future, I like businesses that have high returns on invested capital, preferably over 15 percent and also a durable, high returns on invested capital.

[00:26:59] Kyle Grieve: I’d like them to have a history of profitability. I like, pretty high insider ownership, hopefully even bought on the open market. I’d like to have a management team that has a history of value creation, whether that’s preferably with the business that I’m looking at, but also it could be with another business that they’ve worked at previously.

[00:27:15] Kyle Grieve: And I also prefer businesses that have minimal leverage. I do like serial acquirers and some of these businesses are managed by people that are so talented that it actually does make sense to have a little bit of leverage because you can just earn more profits. After reviewing some of my past mistakes, I think I personally have thought maybe a little bit too highly of my ability to forecast what exactly is a quality business, especially as it in regard to.

[00:27:39] Kyle Grieve: Into the future. So I’m still definitely making enough good decisions that I, I still want to have quality businesses in my portfolio, but it also just opened my mind to another possibility. And, and this was something that I learned from my first actual podcast guest on millennial investing, which was Paul Andreola and I was undiscovered businesses.

[00:27:57] Kyle Grieve: So the second bucket I have, I like to call just inflection point businesses. So These businesses share a lot of similar traits to the quality businesses, but they tend to be really small there. You generally less than 50 million in market caps and they don’t have a long history of profitability, which I usually demand for in my, my quality compounders.

[00:28:16] Kyle Grieve: So I’m looking for businesses that maybe have only been profitable for like two quarters. So that’s why, that’s why I call them inflection points because they’re inflecting into profitability. But with these businesses, there obviously are a lot of risks. So with these businesses, I basically demand like no debt.

[00:28:31] Kyle Grieve: It pretty much you got, you got to have as little debt as humanly possible. Cause again, I want to make sure I’m not getting a zero. So, and then the reason I think that this, this works is that because these businesses are undiscovered, because there’s pretty much no analysts, there’s no institutions really seriously looking at them.

[00:28:47] Kyle Grieve: So you get all these crazy, crazy mispricings and. No, it’s not uncommon for me to find something trading at like a single digit forward P multiple, but also growing top and bottom line at like 50 percent or more. So these are just, these are just opportunities you don’t find in businesses where, you know, like Amazon, everyone knows what Amazon is.

[00:29:05] Kyle Grieve: Every single analyst in the world knows Amazon. So you’re not going to see these huge discrepancies in price and value. And so You know, just a little food for thought. So in 2024, my inflection point business is up 44 percent returns versus 15 percent for my quality businesses. So, it’s kind of a constant struggle in my mind, if I should be allocating more to inflection point businesses or, or, or what, but It was, it’s definitely been a big realization.

[00:29:29] Kyle Grieve: This was especially in 2023 that, a good investment can be made at any level of quality. So, I just want to highlight kind of three different investors that I highly respect. And two of them I’ve interviewed. Scott Barbie. He’s kind of your traditional value guy. He’s this guy’s beat in the market for 25 years and he just buy businesses that are trading well below book value.

[00:29:50] Kyle Grieve: So, kind of your classic Ben Graham-ish type investor, and he’s done it to amazing degrees of success. Then you have someone like Paul Andreola and this guy, he has probably as many multibaggers as anybody I’ve ever spoken to. I mean, he, he, he’s probably forgotten more multibaggers that he’s had than that I know exists.

[00:30:07] Kyle Grieve: And a lot of these businesses are, are ones that despite being large multibankers, no one even knows they exist. And so again, this is kind of where I’ve, I’ve cloned a lot of my inflection point businesses. I would consider them to be lower on the quality spectrum, but a lot of them are businesses that are inflecting specifically because I think the quality of the business is improving.

[00:30:26] Kyle Grieve: And then lastly, you have someone like Chuck Akre. So Chuck Akre invests literally only in very, very high quality businesses and hopefully businesses that he can hold for extended period of time. He’s written extensively about how, selling your, your winners is, is probably the biggest mistake that you’re going to make as a, as an investor into high quality businesses.

[00:30:44] Kyle Grieve: So, the point being here is that all three of these guys have been just so successful and they have very, very different strategies and they own very different businesses that are different in quality and they’re different in market caps. And so this is a really big concept that I spent a lot of time thinking.

[00:30:59] Kyle Grieve: And so I just want to mention here as well, Monish Pabrai has mentioned that his strategy has altered over time based on what the market was offering him. So You know, I can’t really guarantee that the strategy I’m using now is going to be the exact same in 10 years, but I can guarantee that I’ll definitely consider quality all the time in all the investments and all my investing frameworks.

[00:31:19] Shawn O’Malley: Yeah. I imagine those inflection point. I mean, obviously you have to pay close attention to any business you own and are investing in, but those inflection point ones sound like something that you’re kind of probably monitoring much more closely than, like to be cliche quality compound or that.

[00:31:34] Shawn O’Malley: It has so many recurring revenues and so many modes that you can kind of go to sleep at night and you don’t have to worry about whether people are still going to be buying iPhones. But you know, and then I found that really interesting too, that, that destination principle you talked about, cause it’s sort of like, mongers inversion principle where you’re, you’re thinking about thinking with the end in mind and imagining, if this stock is going to get me a 20 percent per year return over five or 10 years.

[00:31:57] Shawn O’Malley: What has to happen five years from now to get that 20 percent return? Are you going to, is that all that coming from 20 percent growth and for cash flows? Is it coming from dividends and buybacks? Is it coming from an, an expansion and the PE multiple? And it kind of, it kind of grounds you in reality.

[00:32:11] Shawn O’Malley: Cause you, it’s easy to think, Oh, I’m buying Apple. This is great. It’s going to come down to 20 percent a year for me. Like it has for, whatever, how many ever use it has in the past generated excellent returns. And then you’re thinking, are they really going to sell 20 percent more iPhones?

[00:32:24] Shawn O’Malley: Who are they going to sell them to? Who’s buying these iPhones? And so it’s, it’s an interesting way to think about things, but I want to talk a little bit about having skin in the game. Obviously, we’re all podcast hosts here. And that means we talk publicly about investing and even on our specific portfolios as you just have Kyle.

[00:32:42] Shawn O’Malley: But there are some obvious and less obvious conflicts of interest that can arise from that, I think for starters, and I don’t think anyone could accuse you of this with your portfolio, Kyle, but there is a temptation to cover the most popular stocks and markets just to get more eyeballs on our content.

[00:32:57] Shawn O’Malley: Even though the Tesla’s and videos of the world are probably not the best investments for long term investors when they’re in the middle of some hype cycle. So I really enjoyed an interview you did with Brian Stoffel of the Motley Fool who talks about what it means for him to work in media but be transparent about his track record while also having skin in the game as an investor. Here’s a clip from that conversation.

[00:33:19] Brian Stoffel: Let me start with why it’s so important to be transparent with why I was a writer for The Motley Fool for a number of years, and anyone who follows me knows that I’m heavily influenced by the work of someone named Nassim Nicholas Taleb, who’s written a lot of books that are very influential, especially for myself.

[00:33:36] Brian Stoffel: One of those books is called Skin in the Game, and in it, he talks about how Especially if you’re someone who is giving advice about anything that you need to be exposed to downside risks, if you’re wrong, if you’re going to make a living off of giving advice. And I really took that to heart. And so I read that, like, I read that from him before he came out with his book skin in the game, and I’ve actually interviewed him twice.

[00:34:03] Brian Stoffel: So I’ve had a chance to interact with him. And when this happened, it was probably around 2017, 2018 that I kind of hit me. That I was like, huh, I’m not doing that because as a writer. I wanted to write about stocks that were really, really popular and writing about a stock that is really popular and having an opinion about a stock that is really popular.

[00:34:27] Brian Stoffel: Guess what? That gets you a lot of clicks and a lot of clicks means that you’re more likely to stick around as a writer. And of course, the problem with that is, is that if I’m picking out a popular stock more often than not, that’s a risky stock. And if it’s a risky stock and I’m saying, yeah, you should own it.

[00:34:46] Brian Stoffel: But I don’t own it myself. Think about the dynamics of that, where someone reads this and they say, Oh, so and so says, this is a great buy. I’m going to go out and buy it. And I get paid for that article. And I also get paid if it’s a really popular article, but what happens if the stock goes down? And everyone who followed my advice.

[00:35:08] Brian Stoffel: They lose money and I gain money and there is something that, that asymmetry, there’s something that’s just not okay with that. So what I did, Kyle, that was really eye opening for me because at that point in time, I probably had about seven or eight years’ worth of articles that I’d written. And so I went back and at the Bali fool does a great job of this.

[00:35:29] Brian Stoffel: They, at the, at the end of every article, you have to say whether or not you have a position in this company. And so I went back and I went over hundreds of articles and you can tell I had a lot of time on my hands at this point in time, my daughter had just been born and when she was asleep, I would just sit down and go through these numbers.

[00:35:46] Brian Stoffel: And when I did, it was so clear when I made a recommendation about a stock for the Motley Fool’s free site, to be clear, this was the free site. It’s not their paid services. They did significantly better over the next three years when I own the stock than they did if I said, so and so is a good buy and I didn’t own the stock.

[00:36:09] Brian Stoffel: And that was really eye opening for me. So all of a sudden, I was like, huh, there is a problem with suggesting stocks and you don’t even own them. And it’s funny because a lot of people, and I get the argument that they’ll say, well, you’re just writing about this company because you own it. And I understand that argument, but I would much rather take advice from someone that eats their own cooking than someone who’s just going for clicks.

[00:36:36] Brian Stoffel: That’s why I think that sharing your record is so important. First of all, I think you have a moral obligation to do so, first of all, if you’re in our line of work. And secondly, it makes me a better investor. If I know that my reputation is on the line. I’m going to take a lot more time to think about what it is I’m suggesting.

[00:37:00] Shawn O’Malley: As someone who has invested in the public eye and earned double digit returns for a few years now, which at the time of recording comes out to a bit over 13. 5 percent per year, I think since April 2020. Can you tell us about the hardest parts of managing a portfolio publicly, Kyle? Investing is already hard enough. So having a spotlight on your every move, I’m sure can present some subtle challenges.

[00:37:21] Kyle Grieve: Yeah, so I can definitely only speak from my own experiences here, but for me, it actually hasn’t been that challenging for about managing a portfolio in public. I mean, you made some points there about covering stocks specifically that people would find interesting to hear about.

[00:37:37] Kyle Grieve: Whereas I’m telling you here that I like, Stocks that no one’s heard of and stocks that are really boring. So, there’s a conflict there where I personally find those types of stocks, the ones that I own the most, the most interesting, whereas maybe the audience doesn’t. So that’s kind of hard.

[00:37:52] Kyle Grieve: And, but you know, there, there are enough businesses out there. I think Clay and I luckily have covered a lot of those. On the podcast that we both find interesting, both from, a quality standpoint, they aren’t necessarily insanely expensive, like the ones that you mentioned. And we also find them interesting.

[00:38:07] Kyle Grieve: So that’s kind of how I think we get around that one but getting back to that clip that you just shared a Brian there. So I really, really resonate with his, his point there about how sharing your track record is kind of like a moral obligation. So I’ve always thought the exact same thing, even from before I, I, I, I spoke with him.

[00:38:24] Kyle Grieve: And so that’s why I’ve shared my own returns over the last few years. And I plan on continuing to share that into the future. So, with, with social media, there’s obviously you’re just exposed to millions of people out there that are, especially in say, for instance, financial Twitter, you got people that are sharing their, their tickers, they’re sharing their portfolios.

[00:38:44] Kyle Grieve: But you really have no idea if they actually know what they’re talking about or not. For instance, a random person can go on Twitter and they can signal to their audience that they’re a genius because they have one winner in their portfolio that, maybe it’s doubled in the last year or a couple months.

[00:38:59] Kyle Grieve: But the same, the same, the same token, they can just fail to admit that they also have nine other businesses that have dropped 50 percent or more in their portfolio. So, is that the type of person who you want to follow into other ideas? Well, I don’t know. I’ll, I’ll leave that to the, to our listeners here, but I just think that sharing a track record.

[00:39:16] Kyle Grieve: Really signals to anyone who wants to listen to me that I’m transparent about what I’m talking about. I’m not going to say, sit here and say that I’m some sort of massive success, but at least you just know that these are my results. Take it or leave it. So, if you think that I’m, I’m not doing good enough, well, then that, that you probably shouldn’t listen to me.

[00:39:33] Kyle Grieve: Or if you think that I’m doing good enough, then cool, maybe you’ll, you’ll find some insights from what I say. So, I, I personally wish more investors did this, but I think that I think there’s a lot of investors that just don’t really track their, their returns closely, or unfortunately, I think there’s also some that just don’t want to admit that they’re, they’re, they’re underperforming the index and, maybe they’re ashamed to some degree of, of sharing those, those facts with other people.

[00:39:55] Kyle Grieve: So for me personally, I don’t know, maybe I have some unique character traits because I do value. Certain people’s opinions, but there’s actually, there’s actually not that many people in, especially in the investing world, whose opinions matter that much to me. So, like I might write about some stock that I like, and I might have some random person with some.

[00:40:16] Kyle Grieve: Profile picture of Warren Buffett who comes and tells me that, I’m, I’m an idiot or, or whatever. And, and that doesn’t really bother me that much because it’s some random person on the internet telling me their opinion and I don’t know anything about them. So, oh, well, I mean, you, you kind of have to live with that for, for sure, if you have an online presence.

[00:40:31] Kyle Grieve: So You know, but then maybe, maybe I’ll have someone who I know and I’ve, I’ve invested alongside with on certain ideas, or I’ve talked to them about my ideas and they know me well, and maybe, maybe they think my idea is not good. So for me, I, I, I think it’s probably good for, for that good for me, because I can go and find out if their logic for their conclusion is better than mine.

[00:40:51] Kyle Grieve: And so, With that, I think I borrow a lot from Ray Dalio where I’m just hopefully trying to come to the truth and not necessarily just pad my ego and tell people that I’m right. So I think that this is just a really, really important thing to do in investing and constantly doing it. And it’s hard. Don’t get me wrong.

[00:41:06] Kyle Grieve: So the next area of sharing my portfolio publicly in terms of problems is definitely in terms of biases that I think it creates. So there’s kind of four ones that I, that I, that I can think of here. So, The first one is commitment bias. So ideas that we end up sharing with others publicly tend to keep us more committed to them.

[00:41:24] Kyle Grieve: And so I’ve had, I’ve probably had this problem where maybe there are some ideas that I had where there was some, maybe there’s some factors that, that, that told me I was wrong, but because I felt committed and I’d been talking about it, maybe whether that’s on social media or even when I had my own sub stack, I felt like maybe I needed to hold onto it longer than I should have.

[00:41:43] Kyle Grieve: Then there’s liking bias. If, if I’m, if I’m signaling. To everyone following me that I like something in the market, and maybe I’m getting a lot of engagement or positive comments based on the idea. I may begin liking that idea too much, which can also cloud my judgment to any potential risks or adverse events that can happen.

[00:42:02] Kyle Grieve: Then the next one social proof, when you share an idea on social media, you often get a lot of other people who are just looking at tickers and they come in and they like, Oh, Kyle likes ticker X, Y, Z, and I like it. And they’ll come in and support you. And it’s, it’s really nice to feel supported.

[00:42:16] Kyle Grieve: And but on the other hand, other hand, I, I know of other investors who on Twitter, who, who, who, who they’ll, they’ll say they, they, they sell it, they sell a specific name and then they get like hate from, from other people that own it being like, Oh, why would you sell it and blah, blah, blah. And so, yeah.

[00:42:30] Kyle Grieve: And I know that that can affect people in a really negative way. And so again, that social proof might also keep you into an idea that maybe you don’t necessarily want to be in it anymore. And so the last one here I have is just excessive self-regard tendency. So I’m sure you guys are aware of that study that where everyone thinks that they’re a better driver than, than they are, then they think they are.

[00:42:48] Kyle Grieve: Whereas in reality, 50 percent are better, 50 percent are worse than the average, but. I think that exact same concept can be applied to investing, right? I mean, I think everyone, everyone who’s, who, who owns individual stocks is inherently saying that. They’re decent at investing. Otherwise they just buy the index.

[00:43:04] Kyle Grieve: So I think, again, this kind of just explains why I think it’s important to display your track record, it’s signaling, hopefully that I have some idea that I know what I’m talking about versus someone who doesn’t share it because of a variety of reasons that I’ve already, already shared. So I think that if you publicly share your portfolio.

[00:43:24] Kyle Grieve: You definitely need to just try to be aware of the biases that may arise because they will arise. No, no one’s perfect. Even Charlie Munger, Warren Buffett, they’ve made mistakes due to biases as well. And so, I, I don’t, I definitely don’t make any recommendations. I don’t think we ever do on the show.

[00:43:39] Kyle Grieve: We, we’re just sharing information with you and hoping that you find it valuable. And then on top of that, if, if I share something with someone. Whether they buy it or not, doesn’t make a difference to me. And I think that that thought process definitely helps me fight off a lot of the commitment bias that some people have, when it comes down to it, I’m in investing to achieve financial independence at one point, not to get likes on, on Twitter or get more attention.

[00:44:02] Kyle Grieve: So once I really drilled that down. Drilled down why I’m investing. I think that really helped me figure out some unique ways to try and fight these biases, but I’m, I’m sure I’m, I’m guilty of some of them as well. It’s a constant struggle. And I think that maybe Buffett and Munger had the right idea of keeping their ideas to themselves these last few decades.

[00:44:20] Shawn O’Malley: I really appreciate the approach that you take and the transparency and involved on it, and also the perspective of what actually matters and. Why we do what we do, but jumping back to you, clay, as we talk about managing portfolios and trying to outperform the market averages, the elephant in the room here is passive investing.

[00:44:38] Shawn O’Malley: I’m sure there’s a chunk of the audience that’s listening to this and thinking, why even bother with all the trouble of constantly searching for new investments or maintaining and tracking a portfolio of companies. And given that we know most professional investors don’t even outperform the S& P 500, at least after accounting for fees, I do think that is a pretty valid thought and concern to have.

[00:44:59] Shawn O’Malley: I want to go ahead and play a clip from your conversation with Eric Balchunas. Eric wrote one of the most thorough books out there on John Vogle, who was in many ways the founding father of passive investing by launching Vanguard a few decades back, which is one of the world’s largest asset managers known for their very low cost index funds. Let’s listen.

[00:45:20] Clay Finck: The rise in the assets under management for Vanguard over the years is just, it’s just Astonishing. They started in 1975, they hit a trillion dollars in AUM in 2006. And today their assets sit at around 7. 2 trillion. And it makes me wonder if you’ve studied the idea, if there is an index fund bubble, we have these trillions of dollars flowing into index funds.

[00:45:43] Clay Finck: These people are buying every month, regardless of the prices of these stocks that are in the fund. So I’m curious what your general thoughts are on that idea.

[00:45:51] Eric Balchunas: It’s a, try to break this down in a chapter eight called some worry with quotes because some are worrying. And I think most of it, it’s meaningless.

[00:45:58] Eric Balchunas: Look at the end of the day, all that’s really happened over the past 20 years is people went from buying an active sort of, let’s say fidelity funds that owns like the popular stocks, but maybe in weightings that are slightly different than the benchmark, but you’re still owning JP Morgan and Apple and Amazon and AT& T.

[00:46:15] Eric Balchunas: We call that closet indexing where you’re, you’re pretty close to the indexing. You’d be short of 70 bits. All this happened is people went from closet indexing to actual indexing. So they’re just owning all those stocks for three basis points. The metaphor I use is the CD to the MP3. I think indexing and ETFs are similar to the MP3.

[00:46:31] Eric Balchunas: They’re just way cheaper and more flexible to get the same thing. It’s not like indexing has invented stock investing. Just like the MP3 didn’t invent music. You’re just buying whatever music you like in a better way, cheaper way. It’s a format change. That said, index funds do buy stocks indiscriminately.

[00:46:48] Eric Balchunas: If the stock has a higher market cap, it’s going to buy it more because that’s where it sits in the index. The market cap though is determined by active managers, and that’s why the S& P 500 can have like a stock like Macy’s fall out of it and Tesla comes into it. The reason Tesla got into it is because active managers like Tesla.

[00:47:04] Eric Balchunas: And the reason Macy’s fell is because active managers hated Macy’s. active controls what’s in the indexes. So the indexes, you are somewhat riding the coattails of active, but they are definitely dictating pricing. That said, let’s say a stock like GE, which went to the gutter in early 2018, I believe it was, went down 50 percent in like half a year because of that earnings report.

[00:47:26] Eric Balchunas: And then ETFs and index funds, the LG took in a ton of money during that period, but it still went down 50%. Now, would it have gone down 52 percent if it wasn’t for those bids coming in from the index fund flows? Maybe. So I think if anything, index and the rise of indexing might put a little bit of a baseline on stock sell offs because there’s a bid coming in.

[00:47:44] Eric Balchunas: But overall, I think anybody over the past couple of years can see with meme stocks and Tesla and Peloton that indexing is not controlling prices here. Otherwise, we wouldn’t see some of these stocks go up and down. So until we stop seeing that, I’m fine with this. I mean, indexing is a great way for people to get the value.

[00:48:01] Eric Balchunas: Also keep in mind, indexing is not uniform. The S and P 500 actually has criteria to get in. There’s a human committee that has absolute discretion over it. That’s why Tesla was late to get in. And then the Russell 1000 has their rules. Then there’s like, Oh, I’m going to own maybe a total market. That’s different.

[00:48:17] Eric Balchunas: And then there’s different indices within mid cap and small cap. And then you get to international. Some hold now some hold China, some don’t. Indexing isn’t really all uniform either, just like active isn’t that active either. So in the book, I sort of try to explain to people that the real trend here isn’t active too passive because some act is very passive and some passive funds are pretty activist.

[00:48:38] Eric Balchunas: It’s not broker to RAA, which is also another big trend, and it’s not mutual fund to ETF, which is a trend. It’s high cost to low cost within every one of those categories. You just see people might, I call it the great cost migration. So try to explain it. That’s really what’s happened here.

[00:48:53] Shawn O’Malley: So that was a bit of a longer clip, but I really like how Eric Balchunas breaks things down.

[00:48:58] Shawn O’Malley: There’s been this huge pool to passive index funds in the past few years. And yet active investors are still fundamentally the ones who are driving the market. They’re the ones on the margin deciding whether stocks are fairly valued or not, but there’s something to be said to for how trillions of dollars’ worth of indiscriminate buying can distort the structure of markets by, for example, normalizing higher and higher average price earning valuations on the S and P 500.

[00:49:23] Shawn O’Malley: So it’s something I go back and forth on a lot. And that is on the one hand, I know that the odds are stacked against you to outperform the market with a more active approach. And I don’t want to be just blindly contributing to buying index funds that are sort of forming a passive investing bubble.

[00:49:39] Shawn O’Malley: After having spoken with Eric and now having chosen to not use index funds, I’m curious to hear how you think about it, Clay. I’m sort of joking here, but is there some part of you that chooses to invest actively so that you’re contributing to fairly valuing companies rather than being a passive investor?

[00:49:54] Shawn O’Malley: Or do you do it because you believe you can truly beat the market? Or is it just sort of a passion for you and life is short and you want to enjoy the craft of investing?

[00:50:02] Clay Finck: Yeah, it’s a really interesting question. I think it ties into a comment that Kyle just made actually. So I don’t really think about investing in terms of should I go passive or should I go active?

[00:50:13] Clay Finck: I mean, that’s one way of thinking about it, but what I really think about is what vehicles are going to help me hit my financial goals. And my main financial goal is achieving financial independence and I’m reminded of a yet another lesson. I kind of picked up from Chris Mayer. I had mentioned to him in an interview that the goal of probably most active managers is likely to beat the market because that’s what their investors are likely benchmarking them against.

[00:50:38] Clay Finck: And he mentioned to me that it really isn’t his goal. His goal is to essentially just compound capital as fast as he can without taking unnecessary risks. So It’s, it’s a, he also made the analogy of trying to, invest and beat the market is like trying to be happy. It’s like focusing on the outcome instead of focusing on the process itself.

[00:50:58] Clay Finck: So none of us can really control what the index is going to do, but with an active strategy, we can control the companies we buy, the managers we choose to partner with, the business models we expose ourselves to and the valuation we pay. And I’m also reminded I was just chatting with Stig yesterday about how, how the index fund especially the S& P 500 has performed over time.

[00:51:17] Clay Finck: So when you look at the 1990s, there was nine straight years where it was up and the average return in the 90s was 18%. So I’m sure people in 98, 99 were like all about index funds, like this is the way to go. And then from in the 2000s, it had actually a negative return with dividends reinvested. So I, I sort of feel like we’re, we might be at some sort of similar period.

[00:51:40] Clay Finck: I’m not making any projection on what I think the 500 is going to do over the next decade, but like it’s been really good since 2010 it’s been north of say 14%, something like that. So, I personally think that the passive investing crowd can sometimes take it a bit far when stating that just pointing to that statistic that says that most active managers underperform, while it might be true, it overlooks some of the shortcomings and limitations of a lot of active managers.

[00:52:06] Clay Finck: So for example, I’m not going to own more than 50 stocks in my portfolio, like many active managers do. And some managers only buy large caps or they only buy us stocks and they have all these limitations and they maybe can’t size up their best ideas as much as some of us can do or an individual investor can do.

[00:52:24] Clay Finck: And they might have pressure to put up short term performance and they feel like they need to beat the market this quarter or this year. And So in some ways I think individual investors can actually have a pretty big advantage over institutions, and that’s not to say that it’s necessarily easy to do, of course, and I also can’t help but just think about how the S& P 500 and a lot of these indexes are just becoming more and more concentrated into the Magnificent Seven, let’s call it.

[00:52:49] Clay Finck: And yeah, it’s, it kind of makes it hard when people kind of ask you what they should, what they should invest in. Like, what, what would I tell a close family member where they should put their money? Like historically the S and P 500, I felt pretty comfortable with that, but it’s getting harder and harder just with.

[00:53:02] Clay Finck: Call it 31 percent of the index being in the top seven names. So, and then I also have to recognize like most people just don’t want to analyze businesses. They don’t want to read all these books on buffet. And yeah, it’s easier for me to do since I enjoy it and I enjoy the process and it’s honestly part of my job to some degree.

[00:53:20] Clay Finck: So with time, I’ve just found some businesses that I would personally much rather own than an index. And even if there’s the possibility that they might underperform for the first One, two, three years, hopefully they will over the longer run. And I know that you mentioned, trying to find these mispricings that kind of contribute to the active side of things.

[00:53:39] Clay Finck: And I think a lot of people mentioned like taking emotions out of investing, but I can’t help but feel some sorts of sense of connection to some of the businesses that I own, which can introduce a lot of biases, but it honestly makes investing a little bit more fun for me. Hopefully I’ll stay invested for long periods of time.

[00:53:55] Clay Finck: Whereas for the S and P 500, it’s more like systematic. You’re just mindlessly buying a basket of stocks. And I’m honestly not sure if it’s a rational way to look at it, but it certainly does make investing more fun for me. And I think I think about how many value investors own Berkshire in their portfolio and they’ve owned it for decades and them, they know Berkshire isn’t likely to vastly outperform the market, but they feel some sort of connection to Buffett and they sort of operate.

[00:54:21] Clay Finck: So I feel a similar connection to some managers out there that I feel are just exceptional of what they do. Another interesting stat I recently read, I’ll be chatting with Rob Arnott on the podcast here soon, and he put out some research that indicated that the typical S& P 500 company gets a markup of around 40 50 percent on their multiple, for those that are included in the index.

[00:54:45] Clay Finck: With that in mind, I think there can be some sort of an advantage to hunt elsewhere for a similar quality business that doesn’t have that markup. It might be just due to their size or due to where they’re based or whatnot. And of course I don’t necessarily recommend that for everyone. It’s just.

[00:55:01] Clay Finck: An observation I’ve had personally. And recently a member of our mastermind community mentioned to the group that the group generally likes to talk about individual stocks and it sort of made me realize that different people are coming at investing at, from a different perspective or different angles.

[00:55:18] Clay Finck: We all have different experiences of whatnot. So for somebody who’s financially independent, many times over, oftentimes their number one concern is going to be wealth preservation. And I think that makes index funds a great vehicle because, the bad companies automatically get filtered out of it.

[00:55:33] Clay Finck: The up and comers get, get put in and it’s never going to be a zero essentially. So I’m still on my road to financial independence. And I think there’s something about, hunting for the next five or 10 bagger or whatnot. Just one or two of those could make a significant difference for me, but for other people, it might not make any difference at all.

[00:55:51] Clay Finck: If they put, a few percent in a stock and it goes up 20 X, they’re still financially independent either way. So, Yeah, it sort of depends on your life situation, your financial goals and whatnot. And I just have found some investments that I think will give me a good shot at achieving my financial goals and then find some assets that I’m comfortable with. And for some people, a passive approach is probably the route to go. So Just found an approach that suits my skill set and my temperament.

[00:56:15] Shawn O’Malley: Yeah, no to your point on, well asking for Hey, what should I best in? Yeah, it’s a question I get a lot too and it’s like on the one hand like you said I want to tell them the S& P 500 and then you Know there’s all that concentration on the S& P 500 as you pointed out and then you know, my next bet is okay You don’t buy like a vanguard total world fund and just invest in the entire world and then You realize 63 percent of the market value of all of the world’s stocks traded everywhere is U. S. companies. So, the want to call it a bubble in U. S. stocks or just the kind of rich valuations in U. S. markets as. And really consumed a disproportionate share of global financial markets. So even if you think you’re buying a total world index fund, you’re still having a massive exposure to the U S basically three times what the U S is share of global GDP is.

[00:57:06] Shawn O’Malley: And then within that you’re, heavily concentrated within the, the s and p 500. So I’m not sure that there’s an easy answer to it, but as you said, it, it depends a lot on, on your perspective and, and where you are in life and, and what you’re, what you’re trying to do and the rest of your willing to take.

[00:57:21] Shawn O’Malley: And that brings me to, and I know we all admire our, our colleague William Green who’s the author of Richer, wiser, happier, and hosts a podcast of the same name. And I think we all agree that that book is, is an instant classic. It’s a book. I always come back to, especially when I want to learn more about specific investors, since William Green does such a great job profiling so many of the investment legends.

[00:57:43] Shawn O’Malley: I know we all look up to after having spent time with a number of them personally, including folks like Charlie Munger and Mohnish Pabrai. I want to go ahead and play a clip from William when he was last on Millennial Investing.

[00:57:54] Clay Finck: What led you to study the best investors, not just to discover those investing lessons, but also to learn how to live a better life as well?

[00:58:03] William Green: I started off originally, I just wanted to make money. I didn’t like the idea of working for a really annoying boss who I had to take orders from. I was always a little bit subversive and independent minded, even as a kid. And so I think when I discovered investing in my 20s, I kind of thought this is this miraculous thing where if you think well, you can achieve a degree of financial independence and security.

[00:58:30] William Green: It’s difficult to achieve any other way. So I had this tremendous advantage because I was working as a journalist. So when I started to want to invest to make money off the stock market, I could actually go and interview all of these great investors for magazines like Forbes and Fortune and. Money and time all these magazines that I ended up writing for and so I would do things like I would go off to the Bahamas and spend a day with Sir John Templeton, who was probably the greatest global stock picker of the 20th century.

[00:58:59] William Green: And so I initially I was looking at these guys thinking, this is so cool. It can kind of teach me to become rich. And then gradually what happened much to my surprise is I figured out, God, these guys are really interesting. These really strange characters who are very incredibly thoughtful. And I think, I think what I gradually figured out is that they were almost like practical philosophers, that they were, they, they weren’t just thinking about these really abstruse esoteric questions, like, does this chair exist?

[00:59:29] William Green: And do I exist? They were thinking about these really practical philosophical problems, like, Wait a second. So the future is unknowable. So how the hell do I make a good decision about the future about anything? And so what occurred to me, when I look back now on 25 years of writing about these famous investors, is that the reason they have to think that way, they have to be very pragmatic, very, very philosophical, In terms of thinking about the future and how to make good decisions is because they have skin in the game.

[00:59:58] William Green: If they screw up, they actually get really punished for it. You can lose tens of millions, hundreds of millions, billions of dollars in the case of some of these investors. So I think that makes them very good thinkers. And so my interest kind of deepened over the years. So it starts off really just being about money.

[01:00:14] William Green: And then I start to think about all of these issues that they’re grappling with, like to give you an example, someone like Howard Marks, like who I write about in one of the chapters of this book, here’s a guy, multi billionaire managing something like 160 billion at a firm called Oak Tree. And he’s literally grappling with this problem of the fact that the future is unknowable. And as he puts it, everything changes. And so when he was, when he was a youngster, he went to Wharton and he was a very good artist and he wanted to study art, but they were like, no, you’re, you’re a finance student. There’s no way you’re allowed to study fine art.

[01:00:48] William Green: So they kick him out of the class. And so he has to find another class to study. And so he goes to this Japanese studies class and discovers this Zen Buddhist concept of impermanence. The word for it in Japanese is [Inaudible] And this has become this kind of defining idea of his life is okay. So if everything is impermanent, if everything is changing, what the hell do I do?

[01:01:08] William Green: How do I deal with the future? And so one of the things that he does is he says, well, you have to accommodate yourself to reality as it is. You have to, you have to say, well, I’m, I’m, I’m not this master of the universe. I don’t know what the future holds. I don’t know what can happen. All I know is that everything is changing?

[01:01:25] William Green: Everything is in constant, and so I have to adapt myself to circumstances. And so this sounds like kind of an esoteric, hairy fairy idea, but it’s actually really practical because you think about how it how it applies both to financial markets and to life.

[01:01:41] Shawn O’Malley: William Green is such a wealth of wisdom, and I want to give you both a chance to share your favorite lessons from studying legend investors, either from directly talking with them or from reading about them in a book like William Green’s.

[01:01:53] Shawn O’Malley: Kyle, I’ll let you take a swing first if you want but let me just say this could be really for anything. It doesn’t have to only be about investing life, friendships, whatever it is, wherever you want to take it.

[01:02:03] Kyle Grieve: Yeah, sure. So, One thing that William told me was that the book is meant almost as a tool to really decide who and what you want to clone.

[01:02:12] Kyle Grieve: And so I think this is just a really compelling message for the entirety of the entire book, because he obviously has all sorts of different kind of wide ranging concepts from each chapter. And you can, you can just go through the book and pick and choose whatever you think is going to be most effective for you at this time and point in your life.

[01:02:27] Kyle Grieve: So, every chapter in the book was So good. Right. But I think there’s a couple big ones for me that really stand out. I mean, the chapter one on cloning was, was huge. I, I find myself really focusing on cloning people that I had respect like all the time, like it might be Buffett.

[01:02:43] Kyle Grieve: It might be Munger. It might be himself. They all have just these incredible traits that I think I, I, that I really admire and I want to try to emulate them in my life. One, one interesting part about cloning that I’ve been focusing on is. Just focusing on cloning, very specific attributes from people.

[01:03:01] Kyle Grieve: You don’t know if there’s someone that you, you would respect. Maybe there’s, you don’t like everything about them in their entire life and that’s okay. You can pick and choose what you want to clone from. You don’t have to clone, the entire person. So that’s been a pretty key lesson for me.

[01:03:13] Kyle Grieve: So a few character traits that I’ve emulated from some of the people that I highly respect would be, Buffett is inner scorecard is a concept of just doing business with people that you like. And saying no to nearly everything. Those have been things that I’ve, I’ve found a lot of value in Charlie Munger.

[01:03:29] Kyle Grieve: I mean, there’s so many. Inversion, which we’ve spoken about already a little bit today, thinking in a multidisciplinary manner, thinking rationally, just trying to be, be a learning machine and going to sleep a little smarter each and every day, copying other ideas from other people, reading biographies. I found that to be really beneficial and then just making friends with the eminent dead.

[01:03:48] Kyle Grieve: And I think really focusing on understanding them at a really deep level, I’ll say my mom, I’ve cloned a ton from her, especially with just how she treats other people in such a warm way. And that’s been really helpful for me. Charles Darwin, I think he really taught me a lot about being open minded, staying true to the truth, even if it actually contradicts what you’ve maybe believed in, in your entire life.

[01:04:11] Kyle Grieve: I think that’s a very powerful concept. Howard Marks, another person that’s widely regarded and written about in the book. A couple of things I’ve cloned from him is just constantly thinking about the downside. I think that’s really important. I think it’s important not to get swept up, I think in the euphoria, especially because as he’s pointed out in, in most important thing, it’s during these most euphoric times that you’re probably at the greatest levels of risk.

[01:04:35] Kyle Grieve: Then another couple of other things that he’s taught me is to focus on the process over the outcome and then on luck, just embrace it, embrace the fact that you’re going to be lucky. And also more, maybe more importantly is don’t mistake luck for skill. And then kind of another, maybe just broad group of people that I found really interesting to clone as the stoics, there’s.

[01:04:53] Kyle Grieve: A couple of different stoic principles that I try to live by that I think have made my ability to just deal with the unknown better. One of my favorite tools is just the dichotomy of control, which simply is that there are things in life that we can’t control, and there’s things in life that we can’t control.

[01:05:07] Kyle Grieve: And so I’ve tried cloning their ability to really deal with the unknown. Put my focus on what I can control and accept the fact that there’s going to be tons and tons of events that are completely outside of my control. And I think that really helps me try to deal with problems in a better way. And then, this obviously directly is expressed in the markets, there’s so many things in the market.

[01:05:31] Kyle Grieve: Like clay was just talking about, what’s the market going to do? No one knows like no one. And so, if we know that well, then we can hopefully spend less time thinking about that and spend more time on, in clay in my case, just finding really good businesses that we want to put in our portfolio and make sure that those businesses are doing really, really well.

[01:05:48] Kyle Grieve: And the rest of the stuff that, that’s happening in the world. It is what it is, and there’s nothing we can do to control it, so focus on what we can control. William’s second chapter on investing being a very lonely pursuit was really, really insightful as well. I think this speaks to some of the points that I had about fighting biases.

[01:06:04] Kyle Grieve: Us humans, we’re really social creatures. We crave things like community and social relationships. So, being a contrarian means you’re going out and doing things that nobody else is doing. And that’s a pretty tall order, I think, for, for most people. And I think most investors would prefer to fit in, do what others are doing because it’s safe.

[01:06:19] Kyle Grieve: And you feel like you have support both when things are going really well, but also when things are not going well. But, John Templeton, he was, your classic contrarian. He didn’t invest this way. He, he actively looked for businesses that nobody wanted. Or, or you just wanted ones that everyone hated because he knew that everyone’s out of these and, and these are where you’re going to get incredible bargains.

[01:06:39] Kyle Grieve: And it’s a little, but you know, when you think about that, it’s, it’s a very lonely proposition if you’re right, well, you’re right and, and, and no one else is, is sharing in the fact that you’re right. And if you’re wrong, everyone’s pointing at you like going, ha ha, you’re wrong. You, you didn’t jump on Nvidia or whatever is the, the hot stock of the day.

[01:06:55] Kyle Grieve: So I really thought that was a huge insight. And, and in the same chapter. William wrote these six guiding principles for the non-tribal investor. And I really liked how he worded that tribal pardon there. And so there was some really good nuggets in there. The sixth one I thought was really good, which was super simple.

[01:07:10] Kyle Grieve: Do not chase fads. And I think if you can follow this piece of advice for your entire investing career, you’re probably going to perform a lot better. And most importantly, you’re going to actually make it to the finish line. If you want to create life changing wealth or become financially independent, you have to actually make it to the finish line.

[01:07:26] Kyle Grieve: So I personally try to spend a lot of time trying to figure out where maybe I’ve been wrong in the past and where I could be wrong in the present or in the future. And this helps me identify where maybe some of my investments or some of the actions I’m taking are excessively risky. And then just circling back to Charlie Munger, one thing that I didn’t mention was his study of failure and mistakes.

[01:07:45] Kyle Grieve: I think that’s just profound. I think this was one of Charlie’s superpowers. He really was able to, especially like reading biographies, he’d go back and find out some of the biggest failures that ever happened, even from people that were really and tried to avoid these failures. At all costs. And I think that the reason that a lot of people don’t do this is just that, when you think about popular media, the media doesn’t necessarily talk a whole lot about failures, but they do talk a lot about successes, especially in financial terms.

[01:08:14] Kyle Grieve: So, when, if you’re looking to them for advice, yeah, you’re going to get inundated with all these stories about people being wildly successful. A lot of times maybe even being successful while taking huge amounts of risk. And so people want to emulate that. And that’s probably not what they should be emulating because.

[01:08:29] Kyle Grieve: What that fails to show you is that there was, tens of thousands of millions of people who are maybe trying to do the same thing as the success story but failed miserably. So, I think that trying to figure out failure and mistakes that you should avoid is very, very powerful and people should probably spend a lot of time there on that.

[01:08:45] Kyle Grieve: I know I do. And as an added bonus, this obviously. Applies to everywhere in life, not just in investing.

[01:08:51] Shawn O’Malley: Clay, let me throw that same question at you. What surprising things from studying budget investors has most resonated with you?

[01:08:59] Clay Finck: Yeah. I that last comment you made Kyle was interesting where even with us on the podcast, interviewing investors who beat the market, there’s going to be some survivorship bias there.

[01:09:08] Clay Finck: And one thing I appreciate just about our show and Williams as well as being super selective and who we allow to shine a spotlight on. And I think One of the common traits I see is just humility in that like luck played a factor and they don’t know everything they admit they don’t know everything and luck is part of it, but also a lot of hard work, grit and skill and whatnot.

[01:09:28] Clay Finck: So there’s, there’s a lot to sort of think about there. And I think we could probably do an entire episode on what we’ve learned from all these great minds. I’m reminded of Dan Rasmussen last year. I interviewed him and he mentioned to me that. Yeah. investing is like the intellectual Olympics. And that was a comment that just really stuck with me.

[01:09:45] Clay Finck: And it’s just one that recurrently just comes back to mind. And since investing is the intellectual Olympics and invariably attracts just some of the brightest thinkers in the world, as William highlighted in his book. And as a result, there’s just so much to learn, not just in investing, like if you talk to William, he’ll tell you he’s invested in a few index funds and he’s invested with a few of his friends and he might own a couple individual stocks, but it’s like a meaningless.

[01:10:10] Clay Finck: I’m out of his net worth. So he’s studying these other aspects of, of these people. And Kyle highlighted chapter one, I love the title, the man who cloned Warren Buffett, of course, covers Monish Pabrai. And the practical lesson is that you can look at all these, these people and you might not like a lot, a lot of what they do or how they live their life or whatnot, there’s probably, but there’s probably one or two things you could probably pick up and.

[01:10:33] Clay Finck: You can choose whatever suits you the best. And I feel like I have to mention chapter six on Nick Sleep and Qais Zakaria. So it’s recognizing that the emphasis on quality isn’t just about buying good stocks. It’s also thinking about things like how can I, how can I be a quality partner in business or in.

[01:10:51] Clay Finck: All my relationships, what’s a quality day look like, what’s a high quality decision in this, in this moment, and you recognize that all of these things matter, and they all permeate into our entire life. And I was reading up on the history of Costco this week, and the man who essentially invented the Costco model is, his name is Sol Price.

[01:11:10] Clay Finck: And you study a business like that and you realize that all of these quality decisions can really add up into just this one, just magnificent thing that we all call Costco today, which is why both the business and the stock almost have this cult like following that can’t be replicated to any degree.

[01:11:30] Clay Finck: So Nick and Zach, they. Looked at this example of Costco and just notice how this business was like, so strict on always having ultra slim margins. And they decided to clone that and decided to charge an abnormally slim management fee to their investors. And when they shut down their fund, they simply told investors to go buy.

[01:11:50] Clay Finck: Berkshire, Costco, and Amazon. And there wasn’t that much else they needed to do. They could have milked that fund for the rest of their life and made money off their investors, but they just said it’s not the high quality decision essentially. And then of course I have to mention Buffett and Munger as well, who Kyle and I discuss in depth on we study billionaires.

[01:12:08] Clay Finck: So Buffett, when I was, just graduating college, I always thought about how he always encouraged people to pursue a line of work that they really enjoy doing. And that really inspired me to join TIP. And that was very impactful for me and just totally changed my life. So just very grateful for Buffett, just continuing to harp on that advice.

[01:12:28] Clay Finck: And then another big lesson from Buffett is that the best investment that you can make is in yourself. Like it’s so simple, but it’s like also so simple that it’s easy to overlook. So many people, I think we’ll talk to maybe someone like us or someone that’s into stock investing and just want to get the next hot stock tip.

[01:12:43] Clay Finck: But They should probably turn and just look at themselves and invest in their own education. How can they, find that themselves or how can they develop the skill sets to lead to a good investment? So most of the greatest investors are learning machines for a good reason because there’s just always more to learn.

[01:12:59] Clay Finck: And that’s the investment that pays the best. And the biggest dividends over a lifetime. So I guess another comment is that Buffett and Munger, they just put a huge emphasis on the people you choose to surround yourself with. And that is also something that’s just hugely important and hugely powerful and something that I think we can all always work on to some extent and it’s a challenge. I’m also just always working through.

[01:13:22] Shawn O’Malley: It’s been a ton of fun to chat with you both today, and it’s sort of a trip down memory lane to listen to all these clips from past episodes and interviews that you both have done, so I’ll just tell the audience to go and follow these guys on Twitter for more on them, and of course, make sure to tune into We Study Billionaires to hear more of their episodes.

[01:13:40] Shawn O’Malley: All three of us will be in Omaha this year for Berkshire 2025. And you can just email me at Shawn@investorspodcast.com. That’s S H A W N @investorspodcast.com for more information on how to attend our meetups. But any last thoughts, guys?

[01:13:57] Kyle Grieve: Nope, nothing for me.

[01:13:58] Clay Finck: Thanks for having us.

[01:13:59] Shawn O’Malley: Cool. Well, with that, keep an eye out for the first episode of our new Intrinsic Value Podcast next week.

[01:14:05] Shawn O’Malley: Where I’ll break down Madison Square Garden Sports, the publicly traded parent company for the New York Knicks and Rangers. It’s not every day you have the chance to study a stock tied to major professional sports teams, especially one that is seemingly trading at a significant discount to its intrinsic value.

[01:14:22] Shawn O’Malley: But that’s for next time. I’ll send you off today, as always, with a quote. This one is from William Green. He says, you get a lot of A’s and B’s in school, in the stock market. You get a lot of F’s, and if you’re right, six or seven times outta 10, you’re very good. See you all again next week for the debut episode of The Intrinsic Value Podcast.

[01:14:41] Outro:Thank you for listening to TIP. Make sure to follow Millennial Investing on your favorite podcast app and never miss out on our episodes to access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.