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SIMON ERICKSON | from 7investing

· Podcast Episodes
Simon Erickson 7investing The market is always right you have to adapt to the market

It's important to see things from a different perspective. Ideas need to be tested. Thinking you have a great investing idea doesn't make it one. You need critics who pull no punches in letting you know why you could be wrong.

Simon Erickson from 7investing has a diversified team of seven advisors with real horsepower. Two PhDs, Master's degrees, a military perspective, computer science and biotechnology expertise.

“I always love it when people say, ‘Oh well, a reasonable valuation is this’ or ‘the market's got it wrong.’ No, the market is always right. You've got to adapt to what the market's going to do. You can have conviction in something that you think the market hasn't seen yet, but as investors, we should be careful to not get frustrated if our thesis doesn't play out. Because at the end of the day, we represent a very, very small percentage of the amount of money that's being trading hands over there.”

Simon Erickson is the founder and CEO of 7investing. He is one of the stock market’s most forward-looking investors, focused on identifying disruptive innovation and finding developing trends before others may even be aware of them. 

He does this by traveling often to industry conferences and by speaking directly with business, scientific, and academic leaders ─ to learn firsthand about the cutting-edge technologies impacting the business world.

That included a conversation in 2014 with a Harvard postdoc about a new scientific breakthrough called “CRISPR”. And then a trip in 2015 to NVIDIA’s Silicon Valley headquarters to learn about a new field of “deep learning.”

But he also personally dives in to these developing trends. He’s been plugged-in to immersive virtual reality, rode in the beta-version of Waymo’s self-driving car, bought his first Bitcoin for just $247, and took a pharmacogenomic DNA test to explain how he’d react to prescription drugs.

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“Investing is very personal. It's something that you should always understand what type of investor you are. And then look for companies that match that type of investor. What I mean by that is that there's never going to be someone else managing your money for you that's going to perfectly represent how you would manage your own money. It's always going to be a little bit of the puzzle piece doesn't quite fit exactly as you'd like it to. And we each have our own risk tolerances and their own industries that we're comfortable with.”

Simon previously worked for seven years at The Motley Fool, where he most recently served as the lead advisor of Motley Fool Explorer. In this role, Simon ran an investment newsletter that profiled innovative trends, personally directed more than $1 million of funds into a real-money investment account, and managed a team of 22 people. Explorer was recognized as one of TMF’s fastest-growing and highest customer retention newsletters.

Simon has also been active in the financial media, offering his opinion of Facebook’s 10-year plan to CNN, discussing Alphabet’s “other bets” to CNBC, and sharing his thoughts about innovation and investing to podcasts and newspapers across America. He has a BS in Chemical Engineering from the University of Texas at Austin and an MBA in Entrepreneurship from Rice University in Houston. In his spare time, he enjoys traveling, listening to rock music, and spending time with his wife and daughter. He has now watched Frozen approximately 43 million times.

Simon brings a passion of digging into developing trends to uncover opportunities for 7investing. He believes personalized medicine and machine learning inference are two fields that will be extremely profitable for investors.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil (25s):

Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. Where do you find the most innovative companies and how can you identify them? What are the secrets of machine learning, cloud computing, biotechnology and digital payments? What rocks do you need to turn over to find the mega trends of the future? Joining me to talk about investing in innovation is Simon Erickson. Hello Simon.

Simon (47s):

Good morning. Phil. Hope that things are finding you well in the Southern hemisphere.

Phil (51s):

It's great and I hope things are going well in the evening over there in Houston

Simon (55s):

Always a pleasure to be here chatting about stocks with you.

Phil (57s):

Simon Erickson is the founder and CEO of 7investing. He's an over the horizon investor looking for disruptive innovation. So, let's just go back in time a little. Tell us about your life leading up to this point.

Simon (1m 10s):

Oh, sure Phil. So, I actually, if you can believe it, started as an engineer. I was a chemical engineer that traded in the swatting mosquitoes in a chlorine production block for being in technical sales. My fellow engineers reminded me that I turned to the dark side when I made that move. But it was going out, it was basically finding innovation. Every company out there that we were selling special fluids to wanted to have something that was cutting edge. It would sell at higher prices and higher margins. And so, it kind of gave me an appreciation for what was going on in organic agriculture or deep-water drilling or personal care products or whatever it might be that we were selling. And I started to realize there were all these pain points that every market had to solve.

Simon (1m 51s):

And following an MBA, which happened in there too, an entrepreneurship, I said that I wanted to go into renewable energy. And so, we started building out business plans for a large oil company and their renewable energy strategy. And a lot of it was solar panels, actually, with solar power, solar thermal specifically. And so, we would do that. We figured out the finances, you know, y'all to make some acquisitions with the venture capital group and so on. And then I really turned to the dark side where rather than looking at all of this from the internal of a company of one specific company, I went to work for The Motley Fool for seven years and started look from the outside in: finding opportunities, finding those pain points that markets were experiencing, figuring out where the innovation was taking place and actually making investments in the best in breed companies.

Simon (2m 34s):

And my favorite chapter of the entire story thus far started in March of 2020. That's when we founded 7investing, it's a team of myself and six other lead advisors who are doing the same thing. We're going out and we're finding our very, very best opportunity in the stock market. Each and every month, we're compiling those seven ideas together into a subscription product, which is our 7investing membership. That's where I am today.

Phil (2m 58s):

What I'm struck by, there seems to be this well-worn path, especially amongst you and your advisors, that you haven't come from a finance background that you've come from somewhere else and especially from academic backgrounds or, like yourself, engineering backgrounds. So, it's like coming from investing from a completely different angle from someone who's gone to Harvard or the Wharton School or any of those major business schools.

Simon (3m 22s):

I agree, Phil. I actually really like having a diversified team and we've got some horsepower, you know, on this team of advisors: we've got two PhDs, two that have master's degrees, military perspective, computer science background, biotechnology background. I mean, it's, kind of, important to see things from a different perspective. We've got seven of them. We're not afraid to pull the punches for each other either when we talk with each other about our stock picks every month. The Q&A of our deep dives tends to get pretty interesting.

Phil (3m 50s):

Well, that's the thing as well, because you always have to come up with a thesis, but then it's a great thing to have that thesis tested. And I think new investors really should understand that just because you get an idea in your head about something, doesn't mean it's actually going to be right. That you should test it as robustly as possible.

Simon (4m 7s):

Yeah. Definitely different perspectives makes all of us better investors. I certainly agree.

Phil (4m 11s):

So, what was your first investment and was it a good or bad one?

Simon (4m 15s):

Well, believe it or not, it was GE. I was working for GE technical sales at the time so put a lot of money into the stock as well. Luckily, I actually got out of that before GE finance turned into some problems right there in the recession of 2008. But, you know, it, kind of, was a diversified company, had a lot of different irons in the fire. It, kind of, exposed me to a lot of different things, whether it was finance and the bank of GE, if you want to call that, aircraft engines, chemicals, I mean, she had a whole bunch of stuff going on. It, kind of, was interesting to see how a company that large was allocating its capital.

Phil (4m 45s):

I know you were working there, but what was your thinking in terms of getting there? Did you actually think about it?

Simon (4m 50s):

In terms of investing for the company?

Phil (4m 52s):

In terms of investing, yeah.

Simon (4m 53s):

Just, kind of, fascination, you know, it actually led me to some fertilizer companies that I invest in too. I went out and saw what was going on out there. With personal care companies, the same, kind of, thing. I guess maybe your first investment for a lot of us is, kind of, what, you know, right? Invest in what you know, invest in what you're comfortable with. That was my world at the time. So that's what I knew.

Phil (5m 10s):

Mm that's interesting. My father worked for a subsidiary for GE about 20 years ago as well, as a huge company, diversified company. It wasn't just finance, was it?

Simon (5m 20s):

To say the least, Phil, a huge company and very diversified. Absolutely. I'm not sure I would recommend that as an investment, but certainly at the time it opened my eyes.

Phil (5m 28s):

And what about the fertilizer companies?

Simon (5m 30s):

There was a big push in organic farming, that was one of the big drivers. And then also, kind of, the ROI on fertilizer was pretty terrible for a while. Companies were trying to come up with liquid fertilizers, more efficient way of getting nutrients in the crops, coming up with new formulations we played a large role in a lot of that stuff.

Phil (5m 46s):

And so that was when you were working with the engineering firms as well, was that the case?

Simon (5m 50s):

Agrium, Potash, you know, these, kind of, giant diversified cartels, if you will. A lot of them were Canadian. Those were a lot of companies that were really going through a whole lot of consolidation at the time.

Phil (5m 60s):

Was there any light bulb moment when you realized that you had to look further than the latest company report in terms of finding companies to invest in?

Simon (6m 10s):

Yeah. The light bulb moment was when you realize that 70 to 80% of trading is taking place algorithmically, which means it's just computers that are doing it based on quantitative numbers that they're looking at, which are those same fundamentals that are just being reported every single quarter that everybody's got immediate access to there. By the way, if you're doing international trading, you know, it's more like 94% is algorithmic trading. And if you want to compete against that, it's really, really hard. You know, it happens so, so quickly and it's all just driven by the numbers: earnings per share, hit or miss, you know, revenue growth versus expectations. Things like that, we don't have a big advantage as individuals. Unless you think in a fraction of a second, which I certainly do not.

Simon (6m 51s):

But what I like to do is look back, really, kind of, step back from the quarter to quarter or those pure numbers that you're seeing in all those quarterly reports and just say, "Okay, how is the company actually spending its R and D budget? And are they getting higher priced products that they're developing because they're a step ahead of others? How's the competitive composition looking? How is the market changing? Is it expanding? Is it going to be really competitive or are you going actually going to have some freedom for some pricing power?" A lot of its, kind of, influenced by that background that I had in sales. I mean, it's just, kind of, putting a different spin on that. You still see that markets are changing; you still see that companies are trying to get the best bang for their own buck. Just now from an investing perspective, you mix in some valuation work with that as well.

Simon (7m 32s):

And those are the kinds of companies that I want to be investing in, it's a much, much longer-term horizon rather than the quarter or the quarter fight that we're having against computers out there.

Phil (7m 40s):

That's really interesting figure. What was it? 70 to 80% and 90% of international trading is algorithmic. I just wanted to dwell on that for a moment. Where is this trading happening, who is instituting that trading, where does it come from?

Simon (7m 53s):

Yeah, we've got, you know, $35 trillion of retirement funds in the US, right, Phil? I mean, this is a huge tool for institutions that might have $20 billion, might have $100 billion or more of assets under management. And of course, when you've got that larger funds, all of it as your risk profile, you know, you want to play offense, but you also want to play a lot of defense. And a lot of that have got hard rules on where they can allocate, how large of a position they can have, does it have to be a dividend paying company? Does it have to have a certain market capitalization of the company? I mean, all of those are, kind of, written in the software and algorithms and govern where those monies are going. If you're a retail investor, you know, maybe a $35,000 account is a large account for you, right?

Simon (8m 36s):

And that's 1000000000th of the $35 trillion that's in retirement of funds. So, you can find opportunities out there that aren't necessarily playing by the same rules. But at the end of the day, good companies are good companies, innovation is innovation, large funds are going to eventually come around to where the cash flows are and where the innovation's taking place.

Phil (8m 56s):

And these, large funds are doing this, obviously, to take away the emotion, whereas someone who's got that $35,000 to invest, it's all about the emotion, isn't it?

Simon (9m 5s):

Yeah. I mean, we play with different rules especially in many ways, hardwired, not by algorithms, but by our own minds. You know, it stings twice as much to lose money as the gratification you get from making money. And so, we've got to fight our own emotional biases, but my goodness, Phil, that's a completely different podcast. We're going to have another day.

Phil (9m 23s):

Oh, I'd just like to take these turns every now and then.

Simon (9m 32s):

Absolutely

Phil (9m 32s):

What are some of the ways that you look for the trends of the future? I mean, you can talk on your own behalf or on behalf of the other advisors as well.

Simon (9m 40s):

I'm a top-down style investor, which means that I look for the trends that are developing at the market level. And then from those, I try to find the solutions and then from the solutions that companies that are tapping into those. And so, my approach for years, for probably near a decade now has been to go to conferences: more in person in a couple of years ago and more virtually and remotely in this post COVID world we've been living in. But I tend to think in terms of "the market is going to do what the market's going to do, it's going to get tired of the solutions that are legacy or antiquated or not providing a good enough return for its customers". And I tend to look at which way the wind is blowing first and foremost and then, kind of, let that govern where I'm interested in putting my investing dollars to work as a next step.

Phil (10m 27s):

What are the, kind of, conferences you attend?

Simon (10m 29s):

Got South by Southwest this next month, so heading back up to Austin again, that'll be nice. I went to a bunch of biotech conferences in San Diego. Every single year would go to an MIT conference up in Boston. Collision Conference, which is in Toronto, it used to be in New Orleans years ago. The idea is to see either a leader of an organization or even an academic, you know, a PhD or a post-doc talk about what they're really excited about right now and why they're dedicating so much time to doing these things. Phil, I was the guy that would actually try to separate myself from the rest of the crowd, because I didn't want anyone to be annoyed by. Me typing onto my laptop as quickly as possible, but I'd take notes, just, you know, voraciously absorb everything that I could for two or three days of the conference on the airplane ride back, we would just digest it.

Simon (11m 16s):

And then for the next couple of days, figure out what was really going on out there. And that, kind of, now sets the scene and you say, "Okay, what are my options now as a publicly traded investment vehicle to tap into these trends?" That's, kind of, the approach that I would take and it's been that way for, I would say at least six or seven years now.

Phil (11m 30s):

And here I am thinking that south by Southwest is all about Alt-Country music.

Simon (11m 35s):

And that's part of the fun of it and the tacos and the margaritas. I mean, Austin is a perfect place for this, right? It used to be a film festival, you remember?

Phil (11m 42s):

Yeah, that's right. I can't wait to go there. That's one of my dreams: to go to south by Southwest. Can you give us a real-world example of one of these experiences when you are researching at a conference and then came away with an idea for a stock?

Simon (11m 54s):

Yeah, specifically a couple of years ago, there was, kind of, the beginnings of this migration to the cloud where large companies were realizing they needed to start rethinking where they were storing their data and where they were doing the computing for it. And so, a specific conference I remember was Cloud Expo, out there in Silicon Valley, San Francisco. And the thing that kept coming up that everybody was talking about in multiple presentations over and over and over again, was the shift to developing software, kind of, was changing. Cloud native software was very different from how they were traditionally doing things. We call this now today, dev ops, you know, there's not just a centralized administrator that's, kind of, pulling everything together and then figuring out when you're going to roll out an update for your software application that you have.

Simon (12m 38s):

It was allowing, kind of, these microservices, if you will, or these containers to piece by piece allowing people to do them independently and remotely, where you didn't have to all pull together and do this, kind of, massive upgrade that was previously being done. And so, everybody that was doing containers and adopting them was saying the same thing, "Hey, we love this. We love the independence. We love the working remotely. We love this dev ops movement, but we've got this problem with security that now all of a sudden, we're each contributing to our piece. We certainly don't have the same security infrastructure that an enterprise network was having, our firewall was having. And so how can we protect ourselves on the laptops and the iPads that we're doing from our boxer shorts at three in the morning, you know, in our living room."

Simon (13m 21s):

And so, it, kind of, was this solution that was born out of that was endpoint protection for cybersecurity. There was a need for protecting all of these different services, which were all of a sudden exposed for bad actors to start planning malware on devices. But if you could protect those devices, you could still continue to do this containerized version of software development. And so CrowdStrike was the publicly traded company that came from a traditional software vendor, traditional cybersecurity software vendor and said, "Hey, the cloud is moving much faster than we had anticipated. Hey, we see developers are wanting to do things remotely. We need to have endpoint security and we're really going to focus on containers."

Simon (14m 0s):

And it's become a fantastic investment opportunity. If you followed their story for several years now, incredible returns for investors, but that didn't just come out of nowhere, that came from a trend that we saw brewing for several years from the security industry related to dev ops.

Phil (14m 16s):

So, tell us about what you actually did see brewing. Can you specifically talk about that?

Simon (14m 20s):

It was the pain points, you know, you would see the people on stage, they didn't necessarily know even what, you know, CrowdStrike was going to be a preferred solution. But they said, "Hey, we want to do containers. We need to centralize tight protection for us doing the development out there." All of a sudden, that's the top down, that's the market need. That's the pain point, you see. Then all of a sudden, you've got, okay, now you've got a platform, the Falcon platform that CrowdStrike was creating saying, "Yes. Okay, we're going to have modules that can protect different components of you as you're developing these things for a cloud-based, cloud native software. And we're going to make it where you can price it on the user and they can work from anywhere they want to. And it's in point so it doesn't matter where you are, it's the device security itself." And so, it, kind of, you know, you see the need here and then you see the solution and then you see the company and then you see the publicly traded company that leads you a lot of times, to, I think in my opinion, the type of investing I like to do.

Phil (15m 8s):

And that's really something that is so important and is happening in so many areas at the moment where there's pain points. I mean, I can just think off the top of my head, several examples straightaway. Competitors to Uber, for example, traditional taxi companies suddenly going, oh, we've got to change everything. And there are companies supplying solutions for that. Sorry. That was just my little rave about technology.

Simon (15m 33s):

No problem. I've got another one, Phil. I mean, Affirm was another example to the buy, now pay later used to just be called transparency and lending, right? Like we weren't even calling this buy now, pay later at conference a couple of years ago. I saw Max Levchin, who's the CEO of the company now, you know, co-founder of it, basically saying we've got to fix this. People are getting over their head clobbered by credit card fees and their late payment fees and then interest fees. And it's just basically, companies are siphoning money out of the wallets of people that are doing bad behavior. What if we can improve transparency in finance? And so, you see Affirm, it's not being called buy now, pay later. But even that is not built upon credit cards. You have to pay, basically with the debit card upfront with Affirm in these installment payments.

Simon (16m 14s):

But again, industry problem, company with solution, publicly traded investment vehicle, Affirm has been, up until recently as there was concerns about retail, really a fantastic option for investors right out of the gate.

Phil (16m 26s):

And that's where so many developments are happening as well, in FinTech as well. The traditional powers of the large financial institutions are being slowly eroded away.

Simon (16m 35s):

Absolutely. And I really think that, you know, our advisors, I speak for myself and my approach. I think so many of our advisors are thinking the same way too. It's like, you know, they're, forward-looking, they're looking at the industry. They have a lot of great background and experience directly in this. That's how you find the 10 baggers that are going to change your portfolio.

Phil (16m 52s):

There's so many great company stories, so many of them. And many of them just don't go anywhere. What are your filters that you use to try and reduce the risk of being taken in just by the story itself?

Simon (17m 4s):

This is a great question, Phil, because there's also a phenomenon known as the hype cycle out there, which you want to go out and invest in things that are innovative, you want to go out and find things that are cutting edge. But on the other hand, the market tends to build up the expectations to these to be so high, that you can actually get burned and lose a lot of money if you buy a company where the expectations are far, far too high. Perfect example is 3D printing. If you remember the 3D printing craze from a several years ago, we thought that there was going to be 3D printers and everybody's office and everyone's living room and no one was buying Christmas gifts anymore 'cause you were just printing them in the printer behind you. But the reality of that is that everybody didn't want to learn how to use these things. It was far too complicated for a lot of people that were outside of prototyping and it still had its niche and it had its place, you know, prototyping for automotive was the largest customer base, but it's certainly the expectations got far ahead of themselves.

Simon (17m 56s):

And those companies like the Stratasys and the 3D Systems of the world had valuations that were far too high. There were other companies, though, that were finding industrial applications for 3D printing. There were doing them, you know, making it out of titanium, making aerospace parts out of it, hip implants, things like this, that they were really at the high end of the market that made sense for 3D printing. But again, you've got to, kind of, balance out. I almost raised an eyebrow, you know, and it's a red flag for me if you see an investor presentation that has got some gaudy addressable market, right? If you see an investor presentation that's saying, "Oh, we're going to go after a $500 billion market or a trillion-dollar market." To me, that, kind of, is a turnoff. That's, kind of, like, "Ah, you really need to define your market a little bit more clearly and show the progress you're making."

Simon (18m 40s):

The only reason you would want to say you have a massive market is if you're Google and you don't want to get hit with antitrust regulations, right? Look for companies that are executing well and really know where their strengths lie, rather than just trying to go too much, too fast.

Phil (18m 52s):

So that's often called a TAM estimate: total addressable market. And again, I just want to hammer home this point. This is something to be careful about for investors who might be taken in by a story.

Simon (19m 5s):

That's right, Phil, you know, another one that's really big as health healthcare, right? Everybody's always pointing out that healthcare is a $4 trillion market domestically here. And there's so much of an opportunity for drug developers to do things completely differently and disruptively and everything else that's, kind of, going to catch that hype cycle, right? Because it's a really regulated market. It's really capital intensive, it's really hard to change doctor's behavior, especially the more and more serious a condition gets. And so, one other example of maybe that fits this mold is Organovo. Organovo was going to 3D print human organs. And if not organs, tissues to improve the safety profile of new drugs that were being developed and, kind of, just disrupt clinical trials as we know it.

Simon (19m 47s):

You know, if you looked at presentations, they were claiming this. But again, this does not happen overnight. It's super expensive to change behaviors, especially in highly regulated industries. Organovo has had a dilution problem of its investors for several years now, it's been a terrible investment for anyone who's gotten in for at least a year or two or more than that. Be on the lookout for companies that it seems too good to be true, especially in really, really tough markets to crack like that.

Phil (20m 12s):

And especially if I use the word disruptive to much

Simon (20m 15s):

Exactly. Clayton Christensen, "The Innovator's Dilemma" writer, he had this mint to describe a very specific phenomenon. Disruptive innovation works, but even he was like, "Hey, be careful. You're not going to disrupt everything. And the market is always right too." I always love it when people say, "Oh, well, you know, a reasonable valuation is this" or "the market's got it wrong." It's no, the market is always right. You've got to adapt to what the market's going to do. You can have conviction in something that you think the market hasn't seen yet, but as investors, we should be careful to not get frustrated if our thesis doesn't play out. Because at the end of the day, we represent a very, very small percentage of the amount of money that's being trading hands over there.

Phil (20m 56s):

We've covered about how many conferences you attended and the kind of business and academic leaders you talk to. But can we just talk a little bit about what those conversations sound like? Do you have a set of questions in your head already, or you're a bit more freeform than that when you're trying to work out what's going on?

Simon (21m 14s):

Yeah Phil, if you can believe it, for four years I went to a conference every single month with the exception of December for Christmas and during hurricane Harvey here in Houston, otherwise it was basically, you know, straight, almost 50 conferences in a row. The conversations themselves would typically start with just listening to presentations. And if possible, working out an interview with the presenters directly after that, you can get ahold of people especially if you have press credentials to chat with them afterwards. And the conversation would generally start with, what are you really excited about? Why are you devoting so much time and dedicating your research to this topic you're discussing? MIT, especially was this way. And then, kind of, I would make it a point to follow up every six months or a year with the people that I thought were brilliant and just say, you know, what are you up to now?

Simon (21m 60s):

What are you excited about doing today? You know, we talked about a year ago, here's the podcast we put out there. How are things going now? And what has changed? I tend to rely on industry leaders much more than my own personal perspective because there is a bias, they of course want to have their own company well-represented and they're optimistic about what they're doing. But they also, if there are good leaders, they're objective and they see how things are out there and they're willing to change course too, based on what the market's doing. And so, I tend to look for those. I look for innovative leaders. I look for those that I think that are ahead of the trend, but also ones that are maybe even an academic perspective sometimes and willing to change course if the wind blows a different direction.

Phil (22m 36s):

And it's interesting, isn't it, trying to filter out those people that you feel like you can actually trust what they're saying, rather than they just hype merchants, they're going to be continually hyping up their own stock.

Simon (22m 47s):

You can fine tune your radar for those, right? After a while, you can try to figure out who's blowing smoke versus who actually means what they're saying.

Phil (22m 53s):

That's right. Have you got any words of advice for first time investors?

Simon (22m 58s):

I think that investing is very personal. You know, it's something that you should always understand what type of investor you are. And then look for companies that match that type of investor. What I mean by that is that there's never going to be someone else managing your money for you that's going to perfectly represent how you would manage your own money. It's always going to be a little bit of the puzzle piece doesn't quite fit exactly as you'd like it to. And we each have our own risk tolerances and their own industries that we're comfortable with. But our approach with 7investing has always been to let us do some of the research for you, but then hand the torch off, pass the torch if you will, for you to make decisions on your own. And again, it gets back to investing is personal.

Simon (23m 39s):

If you are a risk averse investor where you're going to not sleep well at night if one of the you've bought into falls by 10 or 20%, then you probably want to look for more stable blue chip dividend paying companies that are something that you can say, "Hey, I really feel good about this. And I think that it's got great competitive advantages versus the others that are in this industry." Versus myself as an investor, Phil, I tend to be a little more risk tolerant. I don't mind if a company that I have in my investment portfolio falls by 50% or more. That I'm comfortable with, I might actually be looking to add a lot of times if I think the market has gotten it wrong, but again, that's a different risk profile.

Simon (24m 19s):

I think we should all understand ourselves as investors and that will make your returns and your ability to sleep much more doable at the end of the day. Investing is meant to be a long-term vehicle. You don't want to be stressing yourself out on a daily basis.

Phil (24m 34s):

And I think that's important to understand, especially right now, we're recording in early February, 2022. And we've seen a lot of companies on the NASDAQ really gets sold off recently. And I think for a lot of people, they might not have had that experience before. And that's when you really understand about yourself and how you personally are going to feel about risk in your investing life.

Simon (24m 58s):

It really is. I mean, I like to tell the story back in 2008, when my portfolio was down 40% at one point, and I'll never forget my own wife asking me, "Hey, isn't the point of the stock market for us to actually make money, not lose all of our money, right?" You go through those moments of doubt, especially in times like January and February. That's part of the price of admission for the long-term returns that you get from the stock market. If you want something that's subtly going to go up in a straight line, you buy treasury bills, you buy bonds, you buy very low risk investments. The success of the stock market never follows a straight line. We say that it's a 10.5% long-term return for the S and P 500, but that doesn't look like 10.5% every single year.

Simon (25m 41s):

There are some years where it's up 30%, 27%, some of the years, that sound 10 years of 10 or 15%, or even more than that. But you've got to have the right conditioning that you don't need the money tomorrow to pay your mortgage. Otherwise, you're going to sell and you're going to freak out when the market sells off and you're going to shoot yourself in the foot. But if you're looking over five-year period, preferably a ten-year period, you find the right companies. Let this compounding machine, which is companies using your capital to put it into projects that are going to return better than a bank account or a bond or a treasury bill or a lower risk investment vehicle, I mean, that's where you get true compounding and long-term wealth generation. That's what we're trying to do out there in investing in the stock market.

Phil (26m 20s):

And that's also one of the beautiful things about buying company stock is that you've got these founders and CEOs and everyone who works for that company, basically working on your behalf. You're part owner of that company

Simon (26m 34s):

Right now, especially, the decisions are going to be incredibly important. We are in a higher inflation environment. We are in a rising interest rate environment. This is going to make it, right now, feel very difficult for new comers, new entrants to enter capital intensive industries. And so those leaders, those visionary leaders that have a plan in place and they've got a strong balance sheet right now, they've got a huge advantage from this market sell off that we've been seeing. It's going to wipe a lot of their competitors out, especially those that took on too much debt or made bad decisions early on. It's going to be an interesting year for 2022. I think quite honestly, it's a stock picker's market right now.

Phil (27m 13s):

And it's reflective of earlier times like the internet crash of the early 2000s, where prior to that in the late 90s, any company that had dot com in its name suddenly became very valuable, but then a market crash managed to weed out all of the weeds leaving the best companies behind.

Simon (27m 32s):

Yeah, absolutely. We saw a lot of money flowing through specs through, kind of, alternative investment vehicles. And some of them really put a lot of money on their balance sheet and good for them. They're taking full advantage of it, they did that well. Space race is really picking up, commercial space economy raised a lot of money last year. A lot of money went into biotech and, kind of, genome sequencing companies. And then also chip makers. If you're following what's going on with the chip shortage, you cannot keep up with demand for high performance computing right now. Some interesting industries to keep an eye on.

Phil (28m 1s):

Let's talk a moment about 7investing and this little partnership that you and I have developed in terms of getting some of the advisors on to talk on our Weekend Watchlist episodes. It's been great. I've been so enjoying talking to the advisors from 7investing.

Simon (28m 17s):

I really appreciate it too, Phil, like I said, there's seven of us. I'm one of seven on this team. One, Anirban Mahanti, is right there in your backyard, down in Sydney. Luke Hallard is also in London and the rest of us are based in the States. So, we have got five different times zones on three different continents, which is, kind of, exciting, challenging sometimes for meetings and happy hours.

Phil (28m 38s):

Bit like herding cats, is it?

Simon (28m 40s):

Yes, yes. And multiple languages in different time zones. But like we were saying earlier about the diversity of opinions, it's really interesting. When I started 7investing right from the start, I knew it couldn't just be me. I knew that I could see things a certain way, but it would be so much more awesome to have a full team that could say, "Hey, have you thought about this? Isn't this a risk? You know, maybe we should be considering this." We try to pull all of that into our research reports. I think every investor should, because you don't want to get blindsided. I mean, not every stock is going to knock it out of the park. Not every stock is going to outperform the S and P 500, but when they don't, I think that we should be at least aware of why that is. And so, we'd like to identify those risk factors right up front, and you have to have a diversified team with lots of viewpoints to see that.

Phil (29m 25s):

And 7investing also publishes its results about the recommendations as well. Tell us about that.

Simon (29m 31s):

Yeah. Real time even fill our scorecards 7investing.com/recommendations. We'll always transparently report how we're doing in the good times and the bad. And I'm not afraid to speak up and say, we've got a high beta portfolio. We've got one that moves around a lot more than the market does both in the good times and the bad. We are underperforming the market right now. We're not afraid to say that because we remember a couple of months ago, we were triple the S and P 500's return. But again, I think that that goes back to what type of investor are you? We've got some rock-solid dividend payers that if you wanted to avoid that market volatility, we've got some filters in a way, you can find those types of companies. And we've got some very high-risk investments too that if you want to say, "Hey, we think the market sell off is temporary.

Simon (30m 16s):

Now's the time that I want to sprinkle in a little bit more risk into my portfolio," we've got options for those too. And domain experts, the advisors, in addition to having different opinions on things, we've got purposely, kind of, people that know what's going on in biotech versus computer science versus financial services, like you said earlier. We want to uncover a lot of rocks out there.

Phil (30m 37s):

And of course, if you use the promo code stocksforbeginners, all lower case, one word, there's a $10 discount waiting for you in annual and monthly plans.

Simon (30m 46s):

I certainly appreciate that, Phil. And I'm enjoying this partnership with you. Thank you as always

Phil (30m 50s):

Simon, it's always great to speak with you. Thank you very much.

Simon (30m 53s):

It's a pleasure. Thank you very much for having me

Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.

 

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