SHAWN O'MALLEY | From We Study Markets

· Podcast Episodes
Who wouldn't want to own a fraction of America's 500 greatest businesses? Shawn O'Malley From We Study Markets Newsletter

What’s wrong with helping rich folk get richer? It just didn't make Shawn O'Malley feel good about himself. After a brief Wall Street adjacent career, Shawn made a terrible YouTube video, and ended up as the chief editor and creator of the popular We Study Markets newsletter, He now educates and informs readers in bite size chunks on a daily basis.

We Study Markets is part of The Investor's Podcast Network, the home of the hugely popular We Study Billionaires podcast.

This is part 1 of a 2 part interview with Shawn. The next episode will be coming soon.

We speak about the tendency for young guys to treat the stock market as a casino. Shawn is the go-to finance nerd in his network and his friends share their investing adventures with him. During and after the Covid lockdowns he's been shocked at how many people are now gambling with options and reddit movements

"You would think on the one hand I would be so excited to see more people engaging with investing and even trading. But no, I mean it was actually very disturbing. 'cause I see people And I realize I barely know what I'm doing with options. I understand the basics, but I know enough to know that I shouldn't be missing around with them more than on sort of an experimental basis. And I see friends that are putting huge chunks of their net worth into options that expire in two weeks. That was actually very disturbing to me to know so many people who were kind of being very reckless with their money. And, it was this bubble of psychology. 



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Chloe (1s):

Stocks for Beginners, Phil Muscatello and FinPods are authorized Reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Shawn (12s):

Really what I always tell most people is You know, just buy a couple index funds. You should be looking at the S&P 500. And who wouldn't want to own a fraction of America's 500 greatest businesses? You know there's a lot of things that America does well and a lot of things it does poorly, but we do capitalism pretty well.

Phil (28s):

Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. What's the world's largest stock investing podcast? It's not this one, but a boy from the suburbs of Sydney can only dream. Joining me today is Shawn O'Malley, the chief editor and financial writer for the Investors Podcast Networks We study Markets newsletter, which of course is an offshoot of the We Study Billionaires podcast. How, are you Shawn?

Shawn (54s):

Hey, it's a pleasure to be here, Thanks for having me on.

Phil (58s):

No, thanks for coming on. And I I just kind of wished we recorded our conversation yesterday 'cause it was almost like what we're gonna be talking about today.

Shawn (1m 8s):

Yeah, You know, I I think we started diving into things and we realized that we should be hit and record. But You know, I guess that's just You know. It's, it's fun to just shoot from the hip sometimes and, and you never know. It's where the conversation's gonna go. So hopefully we, we have some fun today.

Phil (1m 22s):

Hopefully fun. So tell me about starting investing when you're about 10 or 11 years old. That's not a very common, well actually It is common. I found so many people that I interview on this podcast do actually have this kind of experience. But how did that work for you? What were your first Stocks?

Shawn (1m 39s):

Yeah, it's funny, I think I got really the itch for stock investing from my uncle. he was a banker and he'd always be watching CNBC whenever we'd visit him. He always had it on the background. And I, think specifically he had on the show Mad Money, he would watch Jim Cramer and that's where You know

Phil (1m 54s):

That was a while ago.

Shawn (1m 56s):

Yeah, it was a while ago. Yeah. And so You know, I found it so fascinating, this world of You know if you could be savvy about managing your own money, really the world is your oyster And. it, it felt like so many people work for money And it. This idea that You know having your money work for you It is like such a profound idea to a 12 or a 13 year old or however old I was. And so, yeah, I actually just would have these kind of weekly conversations with him talking about stock investing and, and trying to keep up You know what he was doing. And I honestly probably mirrored a lot of his early stock investments. He would say You know as a banker, he would say, oh, You know, bank of America's looking cheap or You know. He would gimme a lot of bank Stocks, which are not the You know sexiest picks for a, a teenage boy. But I think that's where I got my start.

Shawn (2m 37s):

And then I remember You know tracking it for a few years and then Fitbit had its IPO And I. Remember thinking, oh my gosh, an IPO, it's a You know, brand new stock. And I somehow thought I was gonna have this early investing advantage of You know surely all of Wall Street isn't You know following this. IPO and You know by watching Jim Cramer's Mad Money, I I have the inside scoop. And so You know, I don't, I don't keep up with Jim Cramer as much anymore, but I really did watch his show every single night, probably through most of middle school and for the first couple years of high school. And yeah, I, I recognized that was not a common experience for your your average You know eighth grader, And I. I read his books and he was really kind of my gateway drug to the world of finance and investing.

Shawn (3m 18s):

So it You know too much as, as he is sometimes maybe mocked today. I I really do owe him a debt for being the person who who taught me a lot of the really basic concepts of how the stock market works and what even it means to to own a stock.

Phil (3m 30s):

It's really good to to have that someone like your uncle explaining these things for you because so many people have their first experience with the stock market going, oh, I've heard about this company. There's a great story there. Like you say, no one else on Wall Street's heard of this story, I'm gonna buy this stock And. of course You know you can often end up as the patsy. Yeah, I

Shawn (3m 50s):

Mean You know it was a privilege to have You know a trusted family member be sort of looking out for me a little bit to make sure I didn't do anything You know too stupid or too reckless or, or even to sort of manipulate me. And it's not lost to me that that's a, a privilege You know and financial literacy is not as common as it should be. And You know, my hope is to kind of be mentor is maybe too strong of a word, but I hope be as similar.

Phil (4m 13s):

Someone's ga someone's gateway drug.

Shawn (4m 15s):

Yeah, someone's someone's gateway drug to getting into finance and investing and You know, my hope is that for most people, when they go and sign into their, to set up their 401k for the first time when they get their first job at a college, that they're not saying, what is an S&P 500 index fund? If we can at least cover the basics of what an S&P 500 index fund is, you're actually at a good place. You're probably ahead of, of the vast majority of people. And if you're confident enough to be during stock picking, maybe you're dumb and naive or maybe you're really sophisticated, but You know, I I think everybody has their own journey of what brings 'em into finance and investing and that you're gonna make mistakes along the way and that's just part of the process. But the more trusted voices you can have in your life, even people like Jim Cramer or people like my uncle or hopefully even You, know what I try to do in my newsletter or your podcast You know, have people that are trying to look out for you and just give you their honest advice and giving you that room to make your own mistakes and learn from your errors, but also when you're ready to learn after you make those mistakes, having somebody who can give you that sort of trusted advice.

Phil (5m 19s):

It's interesting that you talk about an index fund and just even knowing the basics of that as being a perfect introduction into the stock market and It is really, isn't it? Because you're learning about, well, first of all, what an index is and what S&P 500 actually stands for, for example. And then you can start looking into it and see, I mean I know a lot of tools now give you a kind of look through into what It is constituted of and that's such valuable learning experience, isn't it?

Shawn (5m 46s):

I think so, yeah. If you can explain simply what an SS&P 500 index fund is, you're in a good place. I think that's a good general barometer of financial health. And I. Yeah. So many people want to ask me about their stock picks and yeah, you go out to a bar with friends and somebody's saying You know, okay, should I be, should I be investing in Peloton right now? Honestly, people expect me to have some sort of You know insider knowledge of it. This is the stock you should be buying today. And You know, really what I always tell most people is You know, just buy a couple index funds. You should be looking at the S&P 500 and who wouldn't wanna own a fraction of America's 500 greatest businesses? You know there's a lot of things that America does well and a lot of things it does poorly, but we do capitalism pretty well.

Shawn (6m 26s):

We've got some pretty great companies that know how to make money and setting everything aside as an investor, that is exactly the kind of places you want to have your money invested and the companies that are among the best in the world at generating profits. So You know the S&P 500 is a sort of curated index that's You know, updated quarterly and You know, you see some big changes every few years to reflect America's largest companies. So in many ways you could do a whole lot worse than just owning the 500 biggest and most profitable companies in the United States. And I certainly encourage people to diversify internationally, but Like I said that that's a pretty good starting place.

Phil (7m 3s):

And it's interesting being approached by friends in a bath that have have a story to tell you. Often I'll get friends in bars saying to me, oh, what about Lithium You know every EV is gonna be requiring lithium. What about this company? Have you heard about this company? And? of course, I've never heard of the company and my first response to them is always, is this company making money?

Shawn (7m 24s):

Yeah. Yeah. And I think that that is a concept that is very foreign to a lot of people. And I say no, if doesn matter, if it's making money, it's about whether the price is gonna go up and I'm gonna buy it today and sell it to somebody at a higher price tomorrow. And You know the kind of financial jargon term for that is the, the Greater Fool theory, right? Of You know you pay a price and then you find some other fool to pay a higher price and there's no bounded economic reality underpinning sort of what you're doing. And You know there, there's plenty of financial academic literature to, to back up this kind of very simple statement that I'll say that You know a company's share price over the long term is driven by its earnings and its earnings is a jargony word for its profitability.

Shawn (8m 6s):

And so Like I said, whether you're investing the SS&P 500 or you're picking You know individual companies, starting from a place of looking at what is just profitable is a surprisingly simple insight that's really to you commonly overlooked. Yeah, it's it's really shocking You know. Yeah. Like you said, You know somebody will be pitching a, a mining company or a new tech startup and it's, oh, well You know they're pre-revenue, but they have this huge market opportunity and it's like a pre-revenue You know I could set up a lemonade stand and be post revenue. You're investing in something that's pre-revenue. That's really seems incredibly early

Phil (8m 39s):

Shawn. We've jumped straight in. Usually I go, okay, well what's your origin story? But we've jumped right into investing. So let's go back to your origin story. What kind of jobs were you doing before you, you studied finance at college and then moved into the finance industry and started making rich people even richer. Is that the, the basis of it?

Shawn (8m 57s):

Yeah. That that's the, that that was the line I, I told myself for why I needed to get outta my job. But yeah, You know I had a, I had a very basic finance degree, You know was very interested in stock investing and thought that I was on track to be a, a Wall Street all star And, I You know I was doing the, the CFA, which is You know Chartered Financial Analyst Exam. And that's 300 hours of studying And I passed the level one. And speaking of the S&P 500, funny enough, I, I worked at a company called S&P Global, which of, one of the things they do is produce the S&P 500 stock index. I was basically the guy who bailed out investment bankers, not to overstate the complexity of the work that I was doing, but S&P has this data platform similar to You know, a Bloomberg terminal, but they call it CapIQ or CapIQ Pro are the two versions of the platform.

Shawn (9m 42s):

And so basically I was You know, spent months learning to be a trained specialist and navigating their platform. And then I would go on And I would work with investment bankers trying to pull transaction comps on certain You know mergers and acquisitions or trying to value companies. And You know, I would learn how to quickly go into their spreadsheets and figure out, okay, You know this is the error with your formula. This is why the data's not pulling, this is how you should restructure it. So I learned a lot about the actual kind of financial modeling aspect that you might do in investment banking, but also just sort of the technical nuances of this data platform that we were working on. And You know it was fun and exciting at first to feel like, wow, You know, I'm, I'm wasn't really working on Wall Street, but sort of Wall Street adjacent And I had this very clear trajectory to probably making lots of money over the next couple years.

Shawn (10m 26s):

And it was a very standard path to go down, but as you said it, it felt like, who am I helping? Well, I'm helping investment bankers. I'm actually getting paid a lot less than it they are to, in many ways do their job and who are investment bankers helping and You know, I'm not an anti Wall Street guy. I understand the purpose that the financial system serves, but at the same time, You know, you realize you're enriching a lot of people at a lot of big banks and big companies and already wealthy people and you're not really taking even at a minimum, you're not sharing what you've learned and, and certainly not helping the average Joe. I mean, a subscription to the Cap IQ data platform that I worked on with these investment bankers, It is some You know $30,000 a year per person.

Shawn (11m 6s):

The average person is not paying $30,000 a year. So you're already just from the beginning in this very walled off exclusionary world of you're only working with people who can afford a $30,000 membership fee. So it's almost like a country club of You know financial data. You're, you're working with hedge funds and big investment banks that would buy You know a hundred or 200 subscriptions at a time and they would plug different teams into it. But there's certainly this kind of disturbing feeling that am I gonna look back on my career one day and ask myself who did I help and what value did I create for the world? And maybe I'll say, You know I did a hell of a job doing a, a discounted cash flow on Apple stock that some banking team at JP Morgan is looking at or whatever.

Shawn (11m 47s):

But what does that get you You know, really that doesn't create a lot of value for society, or at least for me, it didn't feel like, like it was something I would be very proud of looking back on.

Phil (11m 56s):

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Phil (12m 39s):

That's five zero. By using this promo code. You can subscribe for six months for only a hundred dollars, or check it out for a month for only $25. That's Deep Knowledge and use the promo code stocksforbeginners50 by using this code. You'll be helping to support this podcast, deep Knowledge Investing, helping you to beat the market. Tell us about getting in with the Fast crowd at the Investors Podcast Network. I believe it was during Covid.

Shawn (13m 10s):

Yeah, yeah. No, it's, thank you for asking You know, it was a funny story where I found myself in the, the world of Covid Lockdowns and I'm looking around wondering, okay, You know what, how long is this gonna last for? What, how am I gonna spend my time? And when it quickly became pretty apparent that this may be an enduring weeks or months long phenomenon, I You know, I, I decided, okay, I'm gonna use my time at least somewhat productively. It's very tempting to just be lazy and relax around the house and, and tell yourself You know kind of white lies about why it's okay to, to not do anything productive. But I told myself, I'm gonna go for a couple walks a day. I'm gonna listen to some educational podcasts. So I started out on a walk with my dog, And I searched, just investing on Spotify and the Investors Podcast Network, which is the, the name of the company I now work for popped up.

Shawn (13m 54s):

And then our, our flagship show. We study Billionaires. I started listening to it. And I. I fell in love. I loved, I You know III felt like I had a rekindled love for like value investing all over again. In many ways, especially You know, doing the c f A and learning to think Wall Street and You know they're not talking about Warren Buffet and You know true intrinsic value of companies and long-term ownership. A lot of it's very short-term minded and You know. It just, it's a very different way of, of thinking about investing. And so I fell in love with the We Study Billionaires podcast, And I, listened You know every week for at least You know two years. And then you flash forward to 2022 And I, see an advertisement for a YouTube host position of all jobs with the Investors podcast.

Shawn (14m 38s):

And I, thought You know don don't know anything about YouTube. Don don't think I have the personality to be on YouTube. I don't think I have the face to be on YouTube. I don't You know all, all of the insecurities, all the You know whatever. And You know. I said, I, I gotta get in with this company. I mean, this is my dream. I I've been You know listening to these shows for so long. I saw it almost in many ways as a ticket out of the, the kind of trap of working in nine to five for the rest of my life. So I threw a Hail Mary And I sat down and You know. I wrote a lengthy email applying for the job and filmed these videos that were in hindsight where You know were horrible, we're laughably bad of me trying to pitch myself as a YouTube host. And so You know, I I meet with our, our company's co-founder, stick Broderson and You know he's not impressed with me at all.

Shawn (15m 19s):

You know we'd go 20 minutes into the interview, he tells me I'm too Wall Street. I'm too formal, I'm too corporate. I take myself too seriously. And I just said You know I gotta hit the reset button. I, I'm, I'm starstruck You know, speaking to the person who has You know really changed how I see the world of finance and investing. I mean, we had a a heart to heart conversation after that. And You know, I, I guess he was willing to give me a second chance and he kind of said, I'd like to keep in touch and I'll hear from you You know again, down the road, And I thought it was a very polite way of telling me off And I was thinking You know, I really wasted my opportunity here, my chance to break outta the corporate life and work my dream job in many ways. And You know, funny enough, he followed up and he goes, Hey, I'm not gonna hire you as a YouTube post, but You know I, we have this stock investing guide that we need somebody to write.

Shawn (16m 2s):

I'll let you do that. Take a crack at it. I did, I guess I did well enough that he then said, Hey You know we have this email list and we're looking to build a daily investing in financial markets newsletter. I'd like you to be the person to bootstrap it. So I, I joined in 2022 and I've spent the last year You know doing just that, bootstrapping the newsletter. And now I work with a wonderful team of, of writers and You know we're, we're very proud of the work we do. And You know, ultimately it boils down to just trying to teach as many You know non-financial professionals about how the financial system works and how it impacts them and, and why a lot of this very esoteric Wall Street stuff may actually You know matter to them.

Phil (16m 41s):

And it's so great that we're living in this era now where so much information is available from podcasts, from newsletters like yourself and that Investors actually can get the very basic knowledge that they need to start investing. And it's like we were saying before, you don't need to You know there, there's certain kinds of people if you're gonna be investing in an individual Stocks, you've gotta do a lot of work and a lot of research. But even understanding where your 401k is being invested or what an ETF is so that you You know an index ETF for example. Or even being able to watch out for what may be common mistakes. Are there any mistakes that you've seen people making or have you had any contact with people via the network that have shared their mistakes and oh man.

Phil (17m 27s):

And, and how they could've done things a little better? Oh

Shawn (17m 30s):

Boy. So many mistakes. You know, there's a, I think

Phil (17m 35s):

A plethora of mistakes.

Shawn (17m 38s):

You know, I I, I'm sure I could come up with some specific ones, but I really think just the general phenomenon of what we've seen in markets the last couple years with especially this bubble in 2021. I, I feel like that really hit me at an informative age. You know when I watched these people around me, especially kind of being You know everybody, I, I was the guy that You know I was their one stock investing friend or You know finance nerd and You know people would come up to me and they're day trading options. And I. I'm thinking, what, what do you do? You work in insurance. What You know you, you sell cars. Why are you, why are you day trading Tesla options? You know And. it was some sort of almost You know, it's funny 'cause I'm sitting here telling people how I, I wanna teach them about investing in finance and managing their money well and You know ethical ways to do this stuff and being disciplined.

Shawn (18m 25s):

And you would think on the one hand I would be so excited to see more people engaging with investing and even trading. But no, I mean it was actually very disturbing. 'cause I see people And I, I realize You know I barely know what I'm doing with options. I I understand the basics, but I know enough to know that I shouldn't be missing around with them more than on sort of an experimental basis. And I, I see friends that are putting You know huge chunks of their net worth into options that expire in two weeks. And You know it, it that was actually You know, it was very disturbing to me to know so many people who were kind of being very reckless with their money. And, it was this bubble of psychology. And You know I actually did some things that I regret that were You know semi reckless with my own investments, even though I should have known better.

Shawn (19m 5s):

I felt the pressure. I know if knew a friend who made like $5,000 on Dogecoin and I'm sitting there thinking like, I know better than to invest in Dogecoin, but You know what other crypto projects maybe should I throw a couple hundred bucks at? Or maybe I should be You know buying Tesla options. And well, what is this crowd phenomenon that everybody seems to know that I am missing out on it? And I You know. I actually worried that I had some financial hubris where I thought I was You know too good to take advantage of some of these opportunities that were low hanging fruit to make money. So it was a really interesting experience to live through to realize that even despite everything I've learned and many You know, the, the great Investors that I've studied, I'm just as fallible as everybody else. And I didn't make any critical mistakes, but just feeling that it side of me come out where I could capitulate to the kind of group think of You know maybe I should buy some Tesla stock, right?

Shawn (19m 53s):

You know maybe I should pile into X, Y, Z trending in investment of the day. And I mean it was a, a nationwide phenomenon. You know GameStop, I was in the the, I would go in the Wall Street Bets forum and You know, not 'cause I was seriously following it, but it was just such a fascinating kind of realtime case study to see these people and You know talk about good stories of mistakes that people made. I mean, every day I would go in there And it was somebody made a million dollars and somebody lost their entire life savings And it You know, one story really popped out to me where You know a fellow had said that they took all of their student loans and they took all that money and rather than using it to pay for tuition, they poured it into like Tesla options and they lost it all. You know. And and they're sitting there saying, You know, how do I pay for school this semester?

Shawn (20m 36s):

How do I get more student loans? And, and they were gonna try to take the next round of student loans and take that money and then try to win back. And You know it's just, it, it was a, it was kind of a gross phenomenon really in many ways. A lot of people, despite the markets generally rising so much over that period, there were a lot of individual Investors that tried to go all in and they just got burned.

Phil (20m 59s):

I interviewed Spencer Jacob, who's a, an editor at the Wall Street Journal who wrote a book on that particular subject, And I, can't recall the name straight off, sorry, Spencer. And but what he was saying is that in the end, wall Street still won because they make money clipping the ticket. So they didn't really care. You know. Whereas all of these redditors and bored apes were thinking that we're getting one up on Wall Street where You know sticking it to the man. But in the end it was just increasing the amount of trading and the increasing the amount of money that was flowing through the conduits of Wall Street.

Shawn (21m 30s):

That's exactly right. That's exactly right. Yeah. The amount of times I would go into Wall Streete Bets and read about how they were gonna stick it to some hedge fund and the reality was, like you said, they were just You know feeding market makers. I mean these sort of intermediaries who are market neutral and they just benefit from You know increases in trading volume. And so yeah, You know, I think one or two hedge funds blew up, but it was kind of a shark feeding frenzy for 99% of the rest of the space. So yeah, You know, there again, there was a cruel irony to it and there was this very romantic story, especially going around Wall Street Betts where a lot of these folks were saying, I lost everything, the 2008 financial crisis and I'm gonna stick it to Wall Street.

Shawn (22m 11s):

And fortunately that's just not how it works. Even if you You know, they would target these companies that were very heavily shorted and yeah, sure You know, maybe you, if you could somehow do pull off a short squeeze like you did with GameStop, maybe you can blow up one hedge fund. But You know there's a dozen others that are gonna be market neutral and they're gonna You know, just be printing money because of all the, the increased trading volume. And You know it, it's a very crude way to try to take on Wall Street You know. And, but Like I said it was romantic And, it was very noble to read these people telling these stories about how they lost it all in 2008. And this is their chance to, to stick it to the man And I would ask You know who, what man are you sticking it to You know and and what does this accomplish? And You know people would have no problem wiping out their life savings just as to kind of perpetuate this narrative.

Shawn (22m 55s):

And Like I said it, it was a disturbing thing to watch and especially You know kind of knowing enough to, to know what was really happening. And God forbid you try to speak up in the Wallstreet Betts forum, you're gonna get shut down. It was like, so you just kind of had to watch this You know slow moving accident happen in many ways. Let's

Phil (23m 12s):

Get back to the safe world of valu investing. I've got a bad taste in my mouth after thinking about all of that. So you, you consider yourself to be a value investor, but how has your experience being involved with the podcast network changed your view of value investing?

Shawn (23m 29s):

Hmm. It's a great question. You know, and, and in many ways I think that You know, a a naive version of myself would've told you the only real way to make money in stock investing is to be a value investor. And honestly, in the time sense You know what our podcast company does every week is we interview You know many of the best Investors from around the world, and a lot of them are not You know pure value Investors. They have very different ways of making money in financial markets. A lot of people don't trade with anything to do with equities, right? People trade commodities & people trade volatility and there's all different types of, of trading strategies. So I think as I've learned about more, different ways to make money in financial markets as even a day trader, which is kind of a dirty word, but there are You know actually legitimate ways to, to sort of do that or as this kind of romantic You know, long-term value investor, there's a lot of ways to make money.

Shawn (24m 19s):

And so I try to be a lot less judgmental, I think of other investment approaches and when something's working, I I'm really curious to try to figure out what exactly are the factors driving this success and how much is this attributable to randomness and luck? But You know there are these very real psychological phenomenon that drive asymmetries and markets and You know, for example, You know Momentum trading. You know there were plenty of people that rode the momentum wave of the, this bubble I'm talking about in 2021 or You know 20 20, 20 21. And if You know how and when to get out, a lot of people made money doing that. And that's not my risk profile that that's a game don don't know how to play.

Shawn (24m 59s):

And my skillset is personally better suited for the kind of value investing ideology for investing. But You know really the biggest takeaway for me is not necessarily about value investing specifically, but just being humble and honest about the fact that there's a lot of different ways to make money in markets. And who am I to cast Judgment You know it's very easy to say, oh, I'm a value investor and better than other types of stock Investors and traders & people in other financial markets. And it's just not the reality. If You know how to reliably do what you do to make money in markets, I mean that's valid

Phil (25m 28s):

Because a lot of people start taking on some of the nostrums of Buffet and Munger and they start spouting the quotes and they think, yes, well I'm a value investor because now I've used these quaint little sayings that I've heard. But I think you've sort of also seen, and especially with we study Billionaires because the guys are talking to a whole bunch of people who've made money. And it's like you say, there's all sorts of ways of making money in the markets and yeah, just speak to that for a moment. Yeah,

Shawn (25m 54s):

Well I You know there, there's a certain snootiness to value investing You know, like you said, where you quote these sort of very colloquial things that Buffett would say, and don't get me wrong, I have as much respect for Buffett as You know anyone in the world. I I went and saw him in Omaha speak with Charlie Munger this year, And, it was one of the, the highlights of my professional career. But You know at the same time, it does bother me when I, when I see people just kind of throw out these very generic expressions that Buffett may use and or maybe even misinterpret the context with which He said it. One interesting thing about Buffett is that the investment that he's made the most money on in his career from a kind of a nominal total amount of dollars perspective is from Apple. And that's a company that many for years would've called a tech company and he would've You know, avoided investing in entirely.

Shawn (26m 39s):

And so in many ways he is far more flexible and dynamic of an investor than a lot of people give him credit for. People say he would never invest in tech and maybe Apple isn't a tech company, but I don't know they produce a lot of great technology. So Buffett himself has learned and evolved over time. And I'm not telling anyone to go dive into Tech Stocks that they don't understand, but we do live in a different world and a lot of You know where started out with was inspired by his mentor, Benjamin Graham, who would do You know the expressionist cigar butt investing, where you would pick up these Stocks on the side of the road that had one puff left and you'd get the last puff out of 'em and they'd be You know often companies and dying industries and You know manufacturing or maybe even literally the tobacco industry, You know some dying industry like that.

Shawn (27m 24s):

And You know they would still have a couple more years of profitability before the industry entirely slipped out underneath them. And you'd buy up those companies and they're off a ton of free cash flows for a couple years and you might be able to get some sort of mean reversion and You know you make a few bucks on it, but his start wasn't the sort of long-term own great high quality companies for many years that people sort of associate with him now. And so He said multiple of these inflection points in his career. And I would challenge a lot of the people today who maybe blindly is a harsh word, but sort of blindly follow the teachings of Benjamin Graham and Warren Buffet to consider being as flexible in a rapidly changing world.

Shawn (28m 4s):

You know Adam Cecil, I believe write, wrote a book called Value Investing 3.0 and You know the very premise of the book is that value investing needs to be updated for the modern world. And when you look at how accounting system works and how companies are valued, a lot of the time that You know they'll have these very valuable and tangible assets. They'll have all this software and code that they've built up over the years because some of the nuances of the accounting system, rather than being lasting assets on those companies balance sheets, those are actually expensed. And so You know many of these great companies like Google and Facebook and Apple for a long time looked really expensive on paper because You know rather than these investments that they're making in r d being capitalized on their balance sheet in the same way that a manufacturing company who invests in a warehouse or whatever the way that might be reflected on its balance sheet over 20 years, a lot of these investments in software were being expensed immediately You know it was basically like You know it was lost value altogether.

Shawn (29m 5s):

So the even just there, there's some failures of the modern accounting system to really capture what companies are worth in the 21st century and and how to value this very You know digitally native economy that we find ourselves increasingly moving into. So he's been a great influence on me and I I've really enjoyed reading his book And I Think he is probably touching on a very important inflection point and You know, again, Like I said, I would just encourage a lot of people to be honest about what they don't know and humble about it and You know, be willing to be flexible to think about how the world is changing around them. And You know whether extrapolating lessons from You know the 1940s with Benjamin Graham are so appropriate. And again, there's some incredible fundamental truths that I, I wouldn't want to disregard or have people overlook.

Shawn (29m 49s):

But on the other hand, there's just some technical aspects and markets that are, are very different now.

Phil (29m 53s):

It is interesting to dwell upon the fact that you've gotta actually give yourself a reason not to buy a company. I think it's too easy to look at the good side of a company, look at the story and say, oh, this is a great story, this one's for me. But just to understand how much time Warren Buffett spends reading annual reports, And I just wanted to also say something else that I've been looking at as free cash flow and trying to understand free cash flow a lot more because as you say, companies have changed. And do you believe then that free cash flow does give you a more accurate view of how well a company can go in the future, even if It is putting a lot of money into capital expenditure to grow for the future?

Shawn (30m 35s):

I think so, yeah. I mean, You know free cash flows are the sort of oxygen of a business, the money that is really coming in the door for a company to operate successfully. Kind of what I was talking about before, where you can get these accounting manipulations with how companies assets are capitalized and whether certain things are expensed or not. You know net income is very much an accountant's number. It's manipulated in many ways and that was You know something I spent a lot of time studying in the C F A exams is learning all the different ways you can manipulate net income as a corporate. C F o You can manipulate net income in your favor on a quarterly basis and it's a very short term thing to do and you can put off making certain investments and drain down your inventory Stocks and do stuff like that where You know You can say, oh yeah, You know, look, our our net income is higher today and you're growing You know profits at 4% every quarter, You know whatever It is.

Shawn (31m 28s):

But in reality, you're kind of creating a a paper tiger that It is something that's not durable and lasting. And so free cash flows are, are really the foundation of any company. And if you have positive free cash flows, you can continue operating. And it's certainly one of the, the first things I look for And of course look at net income, but at the end of the day, You know my eyes are, are going to to look at free cash flows.

Phil (31m 50s):

So many companies these days are software as a service organizations And, of course they can have a lot of money coming through the door, but the cost of acquiring new customers means that the profit is can be impaired for many, many years. So is this a way that you use to look at a company like that that would be beyond what you would say is a traditional value investing metric?

Shawn (32m 14s):

Yeah, I mean, software companies are tough. III won't, I won't pretend that I'm an expert in You know software tech investing. I probably read that book on Adam Cecil And I. I found it very interesting and, and more from You know or less from a vantage point of thinking, You know, wow, I, I know so much about how tech companies work that I'm gonna be able to invest in them profitably. But again, to kind of this point that we were talking about earlier, there's so many different ways to make money investing even just within the niche of value investing. There's very different schools of thought of how to make money, which is really interesting to me. The more I learn about the software business, I can see why a lot of these companies are worth the extreme valuations that they are because they have such low operating costs and there's no personal cost to selling another unit of Microsoft, right?

Shawn (33m 0s):

You sell another unit of paper you've gotta pay to produce that paper and maybe you're spreading out your fixed costs and getting You know some economies of scale, but there's still those variable costs. Whereas with the digital world and software as a service programs, there's really no variable cost. Maybe a little bit of computing power and electricity power on the margins, but it's so extremely negligible that these companies can scale at in a way that was You know, literally unprecedented a few decades ago. And that's why You know, we saw era boom in the 1990s and You know, it's not that Investors were wrong, they were just early Wall Street was really excited about these incredible margins of profitability and, and, and ability to scale that companies could have.

Shawn (33m 44s):

That was Like I said just really unprecedented before. So on the one hand I often look at these tech companies, And, I feel like, wow, these are some incredible prices to be paying. But then on the other hand, you have to question You know whether you're using the right metrics to evaluate what they're worth. And Like I said before You know the price to earnings ratio is, is manipulated. And especially if you're doing something like a price to book value, You know Google is gonna look infinitely expensive on a price to book value and you would've You know not invested in it over the last 15 years and you would've missed out on one of the best performing Stocks of all time because of that. Because like what we talked about before, You know book value in a You know company's balance sheet does not necessarily do a good job. At least You know how accounting standards exist today, capturing what a, a modern software based company is worth.

Phil (34m 28s):

Hmm. Okay. Well we might leave it there. It's been great chatting with you, Shawn. Hopefully we can get you on the podcast again. Thank you very much for joining me today.

Shawn (34m 38s):

Thanks Phil. It's, it's been an absolute pleasure, And I. Hope to be back on soon. Thanks

Chloe (34m 42s):

For listening to Stocks for Beginners. If you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

Thanks for having us Phil.

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