Karl Kaufman -
American Dream Investing
Karl Kaufman -
American Dream Investing
There's a lot to learn about investing with the Boss according to Springstreen tragic Karl Kaufman. Karl has years of experience showing how he makes money in the stock market. He gives seminars and hosts talks at universities, investment clubs and financial events throughout the country.
As a contributor for Forbes.com, he writes about money and the markets with the individual investor in mind. His articles and interviews with luminaries such as Tony Robbins, Peter Diamandis and Jeffrey Gundlach have been read by more than a million people worldwide. He has also appeared in Kiplinger, Bloomberg, U.S. News & World Report and Jim Cramer’s TheStreet.
“It's hard to take a 20% drop in your investments. It's a very, very hard thing to process. But if you have the courage of your convictions, if you have that reason to believe that you're right about this stock over the long-term, well, an enterprising investor can use that opportunity to pick up more at a depressed price. The stock market is the only place where when things are on sale, people don't buy.”
Atlantic City – Nebraska
- Many people believe the stock market is like a casino, but investing is not gambling if you approach it the right way.
- An investor owns shares in a real business, usually with a long-term goal of getting a return on that investment.
- I consider day traders and get-rich-quick speculators to be the real gamblers in the market.
- There’s nothing wrong with that, as long as they understand which camp they fall into.
- Personally, I prefer to limit my downside by carefully choosing investments, studying them in-depth, and steadily growing my portfolio over time.
KARL PROPOSING AT BRUCE
EPISODE TRANSCRIPT FOLLOWS BELOW
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Stocks for Beginners
"No hospital wings or college dormitories have ever been named by an indexer. They've been named by people who invested in one or two stocks and rode them for a period of time."
Hi, and welcome back to Stocks for Beginners. I'm Phil Muscatello. When we first start learning to invest in the stock market, we're told about the importance of diversification. It seems to make sense. If one of the stocks in your portfolio drops or even disappears altogether, then you still have other holdings to protect your capital. My guest today is Kael Kaufman, who is going to talk about the dangers of diversification. Hello Karl.
Hey Phil. Thanks for having me on the show
And thanks for coming on. It's a real pleasure to meet you. Karl is from American Dream Investing, a family owned financial membership service, a news publication that shares independent and unconventional thoughts on building wealth through the stock market. So let's just go back a little bit in time. Many of us are not lucky enough to have a mentor in their family to guide us financially from an early age. Tell us about your dad.
Karl (1m 9s):
Yeah, my dad was obviously my inspiration. He is the reason why I called the business American Dream Investing. He was born into poverty in Brooklyn, New York. His father died when he was seven years old, I think. And my dad was the first member of his family to attend and graduate college. He basically worked his way through the corporate world. Never a wall street guy, never a professional investor. And he found that he was doing so well teaching himself and learning about the stock market and investing on his own that he retired at a relatively young age and devoted the rest of his life to investing.
Phil (1m 54s):
That also involved a move to Florida as well at some stage.
Karl (1m 58s):
Yeah, he moved down here and I was visiting at the time before I moved down here. And we always wanted to be in business together. And over time I had a lot of family and friends that would come up to him and ask him what he was investing in or ask him what he thought of a particular investment or a stock. And he would always be willing to share what he was into. And so, like I said, we always wanted to start a business together. I came up with the idea that we should share his trades with the world so that anybody could access what a successful individual investor is doing and how he's managing his own portfolio.
Karl (2m 41s):
So we built that system out and we send real-time text and trade alerts whenever we make a trade. Sadly, my dad passed away last year, but he taught me everything. He knows about the market. We've been pretty much working together and investing for about 20 years and I've taken over the family portfolio now and investing like he taught me as well as with my own spin on it.
Phil (3m 8s):
What are some of the things that you learned as you were growing up? What are some of the things that he shared with you?
Karl (3m 13s):
Well, first and foremost was definitely to think for yourself. That you don't have to be pigeonholed as an individual investor. You can pick and choose from any kind of philosophy you want. When I was about 20, it was when we really started working together and he gave me a copy of Peter Lynch's "One Up on Wall Street", the seminal book on investing for the individual investor written by Peter Lynch, one of the greatest institutional investors of all time. He gave me that. He said, come back to me after you read this book and let's talk investing and see what you have to invest in.
Phil (3m 53s):
It's an interesting book, isn't it? Peter Lynch's book. I've only just read it recently. I mean, it's got some great lessons but I just wonder whether it would resonate today. 'Cause it was written pre-internet and so many things have changed since then.
Karl (4m 7s):
If anything, the individual investor has even more of an advantage now than when he wrote it. Because information is so available, because tools are so available to us as individual investors where you don't have to call up your stockbroker and pay hundreds of dollars for commissions, just to make a trade. You can just go into your pocket and, you know, for free make any trade you want have access to analyst reports and any kind of news is instantly delivered to you as well as every other investor. So, you know, if anything, since Lynch wrote the book in the mid eighties, things have progressed even more so where we don't have to worry about rebalancing our portfolios or answering to anyone except maybe our spouses about how our portfolio is doing.
Phil (5m 2s):
Can we just return to your father for a moment? Cause you kind of skipped through his history pretty quickly. So he grew up poor in Brooklyn and then suddenly he's, he's making good money in the stock market. Where did that start? I mean, obviously you need to grubstake to get started rather than from nothing. Tell us a little bit about that path.
Karl (5m 22s):
Yeah. My dad was a scientist and engineer. And he worked for a food packaging company where a lot of his inventions now are still on the shelves. He started off counting, broken cookies for Nabisco and worked his way up into having 15, 16 different patents. So throughout his corporate career, he would save his money and teach himself how to invest. You know, back in the seventies, when he'd probably got started, he would go to the library and read the value line research reports for free. He would watch Louis Ruckeyser's Wall Street Week every Friday with my mom.
Karl (6m 1s):
And you know, later on it would be CNBC always on in his study: Wall Street Journal, Barons, Morningstar he's completely self-taught. And as you work and build up a nest egg, you have a little more leverage and he was never afraid to take risks. One of the big risks that he took was his company offered a like stock option kind of plan in a retirement account. And he would switch money back and forth between the stock options and a more passive approach based on how he thought the stock would be doing at the time, whether it was around earnings reports or other news.
Karl (6m 49s):
So he was never afraid to take risks and go big. He wasn't spreading his money around to hundreds of different stocks
Phil (7m 5s):
In the introduction. I mentioned that you're not a big fan of diversification. What are the dangers of diversification?
Karl (7m 13s):
Well for an individual investor, you don't have a team of researchers with you. So if you're going to pick stocks, you really only have the focus and attention that you could really give to a handful of stocks for us in American Dream Investing, and my father's portfolio now that I'm managing, we have three stocks that are about 90% of the entire portfolio. And the other 10% is always shifting and changing around based on what we believe are the defining characteristics of those stocks, whether or not that we think they have growth potential we're trading in and out of those stocks, as well as the top three.
Karl (7m 58s):
So we're actively monitoring all that at a time. Now the dangers of diversification really come into play when you're passively investing in an index or ETF or sector, because I mean, first off the S and P 500 now is so concentrated in just a few handful of tech stocks to begin with. You know, I think the top 5 or 10 stocks, I don't know the exact numbers, but they comprise a ridiculous percentage. And you know, you got 400 and something, other stocks that are just not going to perform.
Karl (8m 42s):
And so when I first started writing for forbes.com, I remember Macy's was a real dog, Under Armour was a real dog. And those were all included in the S and P 500 index. So, you know, not only are you getting the outperformers, you're also getting the under-performers that are dragging down your returns.
Phil (9m 2s):
You're getting the good with the bad aren't you?
Karl (9m 4s):
You're getting the good with the bad. And I know in the S and P 500, there are many, many stocks that I would never choose. If I were, you know, as a stock picker, I would never want to own those stocks. I mean, they're good enough to be in the top 500 companies, but, you know, some of them are barely hanging on or their better days are behind them. So you're basically at the mercy of a category that you're not choosing. You know, my dad always taught me that it's very important to have control over your money and your decisions with your money. And so, you know, in American Dream Investing, we we'd stick to just a few stocks that we know everything about and, you know, you're protected from risk that way, you know, look, the environment can always change for certain stocks.
Karl (9m 53s):
And that's the danger of having a concentrated portfolio is that the story could change instantaneously but you have the flexibility to just cut your ties with the company. Another thing my dad taught me was don't fall in love with a stock. And so you can always just sell out and use that cash for better purposes.
Phil (10m 13s):
Can you share what those top three companies are?
Karl (10m 16s):
Sure. We like Apple as our number one pick obviously.
Phil (10m 20s):
Oh, you're such a Warren Buffet kind of guy, aren't you?
Karl (10m 23s):
I know. Well, you know, if Warren Buffet is concentrated in Apple, that's not a bad place to be, and he's done really well. It might be his top investment of all time, for those people who are studying Warren Buffett. For the other two, we have two tobacco stocks because they are just efficient and margin generating machines that pay wonderful dividends. And so the benefit of that is that we're basically creating an annuity for ourselves by the big dividend yield that we understand is supported by their cash.
Karl (11m 4s):
We're not concerned about the cash running out for those companies because of the nature of their product.
Phil (11m 11s):
You've before as well about your dad telling you not to fall in love with companies. And this is something that I noticed when, you know, everyone's standing around the barbecue, talking about what they're investing in, they love the story of the company. And people really do seem to love having a story and being able to talk about it, but this is not necessarily the best way to invest, is it?
Karl (11m 35s):
No. Well, part of Peter Lynch's popular contribution to investing was the whole "invest in what you know" philosophy. And that should be taken with a grain of salt as far as I'm concerned, because just because you know something and you've studied, it doesn't mean it's a great investment. The problem with that is that you really need to understand the financials as well. So, you know, people who glanced over that book will say, oh, invest in what you know. Well, there's a line up outside of Starbucks every day they must be doing well, that might already be priced into the stock. You don't know if their financials can support that, if their free cash flow is continuing to grow over time, if their earnings are growing.
Karl (12m 21s):
Those are the two top things that I look for in a stock, whether they're growing their earnings, because stock prices follow earnings and whether or not their free cashflow is growing over time.
Phil (12m 37s):
What it sounds like to me is you've got a core portfolio, which is, I guess, the backbone, the strength of your portfolio, and then the other stocks that you're looking at and investing in erroneous small proportion. Is that part of the risk management that you practice?
Karl (12m 55s):
Yeah. That's a great question. Well, of those top three, obviously we spend most of our focus on that. And so, you know, anyone signing up for our service, obviously you can have a look into the portfolio, see the three stocks that we're 90% invested in and cancel the next day. So, you know, the real value is showing how we actively manage it day to day, because I'm looking at the charts, you know, from 9:30 AM Eastern time until 4:00 PM Eastern time. And, and thinking about it pretty much all the time, you know, it's a passion and obsession for me.
Phil (13m 28s):
Long-term traders looking at five minute charts.
Karl (13m 31s):
I know, right? That's the thing it's, it's not being pigeonholed into just long-term traders because I could buy and sell the next day if the story changes overnight. Or all of a sudden, I see the CEO on CNBC and I see him sweating profusely, trying to answer a question and he's squirming in front of the cameras because he's obviously telling a lie. But as far as risk management, well, the other stocks are constantly jumping in terms of their weight in the portfolio. And the more they get added, we add to those positions, the more time we spend with them.
Karl (14m 12s):
And it is a way of kind of spreading risk a little bit. Because we want to make sure that, you know, those top three are not going anywhere. Those three companies are not going anywhere, unless all of a sudden iPhones give you brain cancer and we find this out tomorrow, then I don't think Apple is in big, big trouble in the short term. You know, long-term there are always challenges and you have to look at the competition and what kind of moat they have and whether or not they're continuing to grow their company. Apple just astounds me every quarter, how they're able to be so nimble as a gigantic two and a half trillion dollar company.
Karl (14m 54s):
They say, we want to start doing wearables. And they turn into a fortune 100 division. They want to do Apple Music and services and all that stuff and iCloud. And that's a fortune 100 company. It's just astounding. But if you were to come on CNBC tomorrow and tell me that something is dreadfully wrong with Apple and their earnings are going to suffer, and it's a consistent pattern. Well, I would certainly revisit that investment because it goes down to my dad's philosophy of not falling in love with a stock.
Phil (15m 30s):
So overall then, is there a particular number of stocks that you would recommend in a portfolio? Just a manageable amount.
Karl (15m 38s):
Yeah, I'd say the individual investor can't do more than 20 stocks in their portfolio. I just don't think anybody has the time or attention or resources to devote, to truly understanding any more than 20 stocks. I think we have 12 in the portfolio right now. Had 15 to 18 at different parts of the business's life, but you know, any more than 20 and you're really spreading yourself too thin. And I've a great quote about why a concentrated portfolio is, is a great one. It's from James Oelschlager, who who's the founder of Oak Associates and the quote is "No hospital wings or college dormitories have ever been named by an indexer.
Karl (16m 21s):
They've been named by people who invested in one or two stocks and rode them for a period of time". So that was my dad's wealth philosophy as well, is that you find a few stocks that are winners, you hold onto them for a long time and you trade within them and keep constantly revisiting the story.
Phil (16m 39s):
Something that I've learned making this podcast, I've been learning lots of lessons here, is that you've really got to know yourself when you're investing. And if you're going to be picking individual stocks, you've got to be prepared to spend a lot of time to get yourself to this stage where you've got the commitment and the knowledge to be confident in your decisions. And what I often say to people is okay, if you're not going to be doing that, just go and buy an index fund, just go and get ETFs and let someone else look after things for you. Do you find that when people come to you that they want easy answers by getting stock picks?
Karl (17m 16s):
Yeah, absolutely. And these days, obviously there's a lot of focus on meme stocks and GameStop and cryptocurrency and Tesla and all of these high flyers and people just want to get rich quick. I would suggest that 95% of the population, if not more, should just stick with index funds because it takes a lot of work, a lot of dedication, and there is a lot of risk involved. You have to be sure that you're okay with that. In my opinion, the dividend stocks provide a margin of safety, to use a term that Benjamin Graham coined, because regardless of what kind of market environment we're in, whether it's a bull or a bear market, I know that I can count on those dividends, provided the companies can continue to pay them and they're not going out of business.
Karl (18m 14s):
I mean, during the pandemic last year, when all these companies were cutting their dividends, these two companies were raising theirs. And that shows a strong commitment to the dividend. That serves to generate cash within your portfolio that you can then use to either buy more of those stocks, buy other stocks or go on vacation. You can do whatever you want with that cash. That's the beauty of having that protection.
Phil (18m 40s):
I just want to return a little bit to what we were talking about previously about when you do buy an index fund, you're buying the good with the bad. I was talking to another guest yesterday, who is concerned about the rise of what he calls zombie companies. Companies that basically they're large companies, and I can't think of any examples of that at the moment, but they're often very large companies. But it's only because interest rates are so low at the moment that they can continue operating and servicing their debt levels. Have you noticed any phenomenon like that?
Karl (19m 12s):
Yeah. There's stories all over, all over the market. I mean, the interest rates are so low, but inflation is so high also. You have stocks that are, that are issuing debt at insanely low levels for them. And investors are snapping that up because they're so desperate for yield. Another reason to have these dividend stocks that are paying 7%. But yeah, the low interest rates definitely are propping up a lot of companies that probably would not survive had the fed not drop rates to near zero.
Phil (19m 47s):
So on your website, you're talking about a 20.93% annual return over the last 10 years, which, which is pretty good. But some investors, especially the younger ones may scoff at these kinds of returns when compared to money being made in crypto and meme stocks, what do you have to say to?
Karl (20m 6s):
Yeah. If they've been doing this for 10 years with crypto or Tesla or any other stock and they're getting 20.93% a year, then I'd be happy to give them a million bucks and follow whatever they're investing in. You know, these days it's hard not to make money in the market because interest rates are so low and stocks are doing crazy. You know, if you pick one of the right stocks, if you have picked zoom early last year and rode it for a little while, you know, we're seeing in the last year companies with 400% returns, 1000% returns, you know, that's great if you catch that wave. If you're still paddling around out there, well, there's no real short-term path to wealth.
Karl (20m 52s):
You might get rich quick, but you could just as easily lose it also. And so, you know, as a long-term investor with the future in mind and making sure that our companies are still going to be around 10 years and still going to be making the kind of profits they're doing, or we find new ones with similar prospects, I don't think that people could get used to it. And what kind of worries me is the younger generation thinking and expecting that this is the norm. I mean, having gone through the bubble, I graduated college right after the tech bubble popped. We had the great recession in 2007, 2008.
Karl (21m 34s):
Stocks don't always go up. And so, you know, I see this younger generation, that's playing with a lot of leverage, thanks to easy interest rates and margin accounts being handed out like candy. And they think that they're going to get a hundred percent return every week. You know? I mean, it's a, it's a little frightening. And I mean, look, there's been talk of a bubble for a very long time and a bubble can keep expanding until it pops. And so we'll see what happens, but I could sleep well at night knowing that regardless of the bubble popping, I'm still going to be okay.
Phil (22m 11s):
So tell us about Bruce Springsteen and what Bruce and the boss can tell us about investing.
Karl (22m 18s):
Yeah. This is one of my articles I wrote to subscribers. It corresponded with the five-year anniversary of my getting engaged at one of his concerts.
Phil (22m 26s):
How did you swing that?
Karl (22m 28s):
Yeah, it was really cool. I had to call on a couple of favors with some friends of a friend. It was a bit of luck, a bit of persistence, which has worked out well for me over my life. A bit of making your own luck, but in any event, yeah, I got engaged at the Springsteen show here in Florida. He called out my name during the song, the lights and the jumbotron came up on me and I got down on my knee and propose to my wife right there. It's up on YouTube if you look me up. It was an unbelievable moment.
Phil (22m 58s):
Send us the link. We'll post it in the blog post for the episode.
Karl (23m 2s):
Yeah I'll send the link.
Phil (23m 2s):
What was the song he was playing?
Karl (23m 5s):
He was playing his whole album, The River, and having known that he was doing this on the tour. There's a song, it's a deep cut, called "I Wanna Marry You". And I figured, well, you know, nobody tells the boss what to do, but if he would be so kind, this would be a perfect moment for him to set me up for this. And it worked out fantastically.
Phil (23m 26s):
Imagine if she said, no.
Karl (23m 30s):
It was actually her idea. She was joking about it. And that popped the idea in my mind. And I wasn't going to give up until I made something happen.
Phil (23m 37s):
Anyway, tell us about the boss's investing lessons.
Karl (23m 41s):
Yes. So I wrote a fun piece about some songs and how they relate to the investing world. One of which is "Atlantic City". Now the boss being from New Jersey, he knows Atlantic city very well, but Atlantic city obviously has a lot of casinos. And people think that investing is gambling or they confuse the two. And it can be, you know, to your earlier points, people are speculating in cryptocurrency or the hot stock at the moment. But you know, when you're, when you're an investor, you're actually owning a share of a real business and you're doing work in research and that should support your decision.
Karl (24m 26s):
And your idea is to generate a profit over the long-term. There's nothing wrong with gambling if that's what you're into, if you're speculating, if you're day trading, whatever, there's nothing wrong, as long as you acknowledge that that's what it is. For those who say that the stock market is gambling, you know, you can protect your downside so you're not losing all of your money. You know, you can go into a casino and put it all on black at the roulette wheel and lose your money like that, you know, with a good company that is a real business that has real earnings. You're not gambling if you're doing the work.
Phil (24m 60s):
I always like to say that I'm a company that you're invest in has thousands of employees all working for your behalf.
Karl (25m 8s):
That's it. And yeah, one of the reasons I love dividends is that it's like getting a paycheck from a company that you don't have to work for. You know, you don't have to drive to work and answer to the boss. You're just getting a steady stream of income from this company based on their earnings. The next song that I chose as a lesson from the boss was "Glory Days". You know, it's a great song. Sounds like a fun single long bar song, but it's really about your best day is being behind you. And you have to watch out for companies that have had their best days behind them. You know, there are plenty of companies in that S and P 500 index fund that are complacent and just relying on their cash cow businesses to kind of generate income for them.
Karl (25m 55s):
In the meantime, it's so easy for a young upstart to come in and kind of disrupt their business model in a way, you know, you look at Blockbuster and Netflix as the classic example of that. And one last song, I had five of them but I'll only do three for in the interest of time.
Phil (26m 15s):
That's okay. We might put it a Spotify playlist together for the episode as well with all of them and link to your article so people can get to the full thing. Yeah, the third song?
Karl (26m 23s):
Great. The third song is "Reason to Believe". It's not a well-known song of his it's from his Nebraska album. And the hardest thing, as you said before, you know, the hardest thing as an investor is managing emotions. And I'm about to release a book called "The Ultimate Profit Playbook", which is kind of a workbook based on my dad and I and our philosophy. And it's everything we, we do to, to investigate a company. And I spent a whole section of the book just discussing managing emotions because it is the most important thing.
Karl (27m 3s):
You know, it's hard to take a 20% drop in your investments. It's a very, very hard thing to process. But if you have the courage of your convictions, if you have that reason to believe that you're right about this stock over the long-term, well, an enterprising investor can use that opportunity to pick up more at a depressed price. The stock market is the only place where when things are on sale, people don't buy.
Phil (27m 34s):
Everyone's running for the doors.
Karl (27m 36s):
Everyone's running for the doors. It's just, you know, human behavior in a panic. And so having that reason to believe is the real thing, because the way I look at it, you don't lose any money until you sell. And so anything that I see on paper, you know, I take a deep breath, I swallow and I use that opportunity to say, well, maybe this is a good time to back up the truck and really add to my position at a lower price. If I think the business is going to survive and continue on.
Phil (28m 8s):
Then you've got the courage of your convictions.
Karl (28m 11s):
Phil (28m 11s):
So Karl, tell us about American Dream Investing. How people can get in touch and the service that you offer.
Karl (28m 18s):
Yeah. So what separates American Dream Investing from other stock picking services is that it's exactly what I'm doing. It's every move that I make in my family's portfolio. And it's not like an everyday trade alert service. If you look at some competitors out there, they're just sending you lots of information to kind of justify their existence. I don't believe in that, I think less is more. Because it's just so easy to be overwhelmed, especially as a beginning investor. Anyway, I send out text message and trade alerts and commentary on what I'm thinking about the market, the broader overall picture, what I think about the investments in the portfolio and some other things that I'm looking at getting involved in as far as a good potential investment.
Phil (29m 12s):
And also at the beginning of the episode, we usually we find out a bit more about the guests, but have we talked about your father instead of you. But we'll put a lot more information about your biography and the experience that you've got in the episode blogpost.
Karl (29m 26s):
Phil (29m 26s):
Okay Karl, thank you so much for joining me today.
Karl (29m 29s):
Thank you Phil, this was a real pleasure.
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.