Evaluating stocks, at least for long-term investors involves as much art as it does science. It’s not an exacting criteria that one applies. In fact, there’s no one answer and each member of the 7investing team approaches things a little differently. On the October 15 edition of “7investing Now,” much of the team will join the show to talk about how we each approach evaluating companies. We’ll also share our red flags and the things that we always like to see.

Transcript

Sam Bailey  0:14  Welcome to 7Investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:24  Good afternoon 7Investors and welcome to the Friday edition of 7Investing Now my name if you’ve forgotten is Daniel Brooks Kline, I hosted 150 of these shows in a row. And then last week due to nothing but pilot error on my part, Simon Erickson stepped in and I realized I had to come back because I like both of those shows. And you do not want to leave for too long when someone could step in and do a great job.

I participated in one of them. It was a lot of fun. We are going to have a packed show today. I know we say that all the time. But I have Steve Symington. Maxx Chatsko Simon Erickson and Matt Cochrane, Dana Abramovitz has another obligation and Anirban Mahanti is either punching with a kangaroo or sleeping it’s one of those two things because he of course is in Sydney, Australia where the time is very different.

Simon Erickson  1:21  Can’t you be doing both Dan? Can you be punching a kangaroo and sleeping at the same time?

Dan Kline  1:25  Anirban is very impressive. I can picture him doing that. While also hosting a podcast like that could be happening. We are going to talk about our investing process ,how we identify winners. But before we do that, we always start the show with something a little bit fun. I wanted to be a little bit more serious about our fun because I think I’ve exhausted all the silly questions. But as some of you know, I just got back from a trip. So I wanted to ask everyone what stock do they own that brings them the most joy as an investor meaning they like what the company is doing and as a personn? Meaning they like the product

And I’m gonna go first because I’m not sure how much prep time everybody had. Because we just did our members only call if you are not a member, the members only call is worth the price of admission alone. But I’m gonna say for me, it’s Royal Caribbean (NYSE: RCL), that is a stock I really like because as I’ve watched them get through the pandemic and open up new ports, they’ve purchased some land in different places they’ve done some some really smart things that are going to advance their business they’ve used the lower capacity during the pandemic to try out some new things and figure out some experiences that are going to do really well so that is a business I really really like.

And as a customer There is nothing more joyful than going away for four or five days stopping in a couple of islands meeting new friends. So that is a company that brings me joy as a business and joy in my personal life. I will throw it to Steve we will go around the room in order.

Steve Symington  2:50  Oh man, I’d say it’s a toss-up between iRobot (NASDAQ: IRBT) which I would love my Roomba I love our Brava right for cleaning the floors haven’t vacuumed our floors in like a decade. Also owned the stock for more than that. Or maybe if we’re thrown out a bonus pick. Not Apple but Universal Display (NASDAQ: OLED) $OLED is the ticker, right? This is an OLED display on my phone I mean you got to give him credit for that. So that’s another stuff

Dan Kline  3:23  I like the fact that it’s not Apple who put the whole phone together it’s just the display.

Steve Symington  3:28  The display and a plus the fact that I’ve had that stock in my portfolio for more than 10 years and and it’s done quite well so yeah, I’d say those are my top two.

Dan Kline  3:39  I’m curious Maxx Chatsko if you have an answer here because you play in a space that if you haven’t been afflicted by you know certain things you’re not getting a lot of joy out of biotech companies. But of course your investments are not limited to that area. So you don’t have an answer. That’s great. But if you do I would like to hear it now.

Maxx Chatsko  3:56  Yeah, really, I mean there’s not many things that bring me joy in life Dan. And so that’s the reason that I can’t answer this question. Now thankfully I don’t have to take any of the products from my companies that I own in terms of drug developers, I own some energy companies you know some utilities and things I’m thankful for electricity and lightbulbs all that good stuff. I actually did buy a starter position in one of your recent recommendations in the cannabis space haven’t used their products yet but interested in that whenever I get to its city or town where they’re at so

Dan Kline  4:28  Sure you haven’t. Simon Erickson as far as you know as the boss Maxx is absolutely not used any of those products. Simon?

Simon Erickson  4:36  I think we need to expose him to you as often as possible. And if he’s not getting too many things that bring him joy and life we just need to put him on the show more often. For me my particular company would be Chipotle (NYSE: CMG) I love eating there every time. It’s even even more fun when you go with your kids because then you get to see how much they love it so I that’s that’s my pitch $CMG.

Dan Kline  4:55  Chipotle is weirdly universal. My son loves it too. Matt Cochrane what is it for you?

Matt Cochrane  5:02  Probably Amazon (NASDAQ: AMZN). I don’t have to leave the house. I can just order things that works for me.

Dan Kline  5:07  Matt ordering nothing but Snuggies from Amazon. We’re gonna move on to our top story today. And here’s the idea we’re going to talk about how do you identify winning stocks? Well, what’s the logic here, there’s no one process to do it. Someone during our members only call today asked about a company that Simon knew I’ve been researching.

And part of the reason I haven’t added it to my portfolio or made it a pic both are things which could happen in the future is because I haven’t physically visited the company. Now, that’s a part of my process. It’s not a make or break, but it’s something I definitely like to do. And that might not be important to anyone else on the team. So we’re gonna ask everybody and go through a small group of questions. And of course, if you’re watching, we are happy to take your questions.

Or if you have some market questions, we know it’s a Friday. We know you’re all tired, but we are always happy to take your question. So let me start with how does a company get on your radar? And for me, it’s really easy. It’s often just something I do when I’m sitting there and I go like, Hey, is this public? We’ll go in reverse order and start with Matt here.

Matt Cochrane  6:14  Alright, so the first thing I do to research a company, is that the question?

Dan Kline  6:19  Yeah, how does it get on your radar? Do you drive by it? Are you just looking for, you know, obscure news stories, like I know, like in Maxx’s space, maybe biopharma dive might do an article in tech, maybe geek wire will have an early article on something that, you know, might be public or a public company you weren’t aware of, sort of how does it start for you?

Matt Cochrane  6:38  Sure. I don’t know, if I have a set answer for that I feel like investing can be a game of he who turns over the most rocks wins, you know, kind of deal. So I look for ideas anywhere that can be stuff I use in my professional life, or personal life, or it can be like, because one of you recommend a stock for recording could be something like I see on Twitter, you know, I’m always, always looking for new ideas.

So I don’t want to limit that discovery process to you know, just a few, a few ways. I want to have as wide of a funnel as possible, and then filter the companies down from there. So any way I can come across the company like, you know, when you find out where people work, you say, oh, where do you work? And, you know, how do you like it there? Any way I think you can discover a company like have as wide of a funnel as possible is is good.

Dan Kline  7:32  This is why we’re discussing this everyone’s process is different. Simon, you are up next.

Simon Erickson  7:38  That’s totally The key is that there’s no right answer to this, right? It’s It’s such a subjective question that everyone will be different depending on what kind of investor they are. For me, I always try to stay at least a couple of steps ahead of the rest of the market. I think that one of the biggest advantages we have as individual investors is we don’t have those same self-imposed rules that institutions do. Funds say oh it has to be a certain market cap or oh it’s got to be a certain sector or whatever else it is, that so much so many 10s of billions of dollars are going to. We have the opportunity to look where people are not looking.

And so I tend to try to look for what is something new that isn’t being talked about enough yet. But it is starting to get attention of the techies and of the PhDs and the conferences and the things that people are really excited about, that are kind of pushing the limits of the state itself. I think of myself as a top down investor, I look at the market first. And so when we hear about things that are gonna last couple of years, we’ve heard about buy now pay later now we’re starting to see investable options from that we’ve heard about gene editing, we’ve heard about investing options from that for about AD tech platforms we’re seeing options from that.

And like it just continues to evolve, right I mean, Maxx, knows that in the healthcare industry, we’re starting to talk about things like DNA synthesis, and spatial biology and kind of these things that are interesting, but maybe not yet investable. But I think that as individual investors, I always like to keep in touch with what’s going on out there.

Dan Kline  9:02  The process often starts well before you can actually invest. Maxx Chatsko, that’s certainly true in your space, a lot of times it is a theoretical idea, even before it’s an investable company.

Maxx Chatsko  9:15  Yeah, so I take a bottom up approach to investing. So I start off with some interesting tools or technology, sometimes it’s just emerging academia. So I read up on that. And I try to understand all the challenges and opportunities of implementing those tools or implementing those processes. And, you know, usually take some time and some years, but eventually there’s spinouts from academic labs, and those become startups.

And maybe eventually, years later they become publicly traded, or those startups maybe have a collaboration with a publicly traded company, you start to see some interest in those spaces and tools and processes and so forth. So it usually takes some time. But I try to, again, cast a wide net I focused on the technologies and then I look at the competitive landscape and see what companies are there.

One really great place to look for me is medical conferences lately, that’s been, you know, from the comfort of my own home and office here in recent years, but, you know, you go and you see companies or scientists present, and then you see what company they’re representing. And sometimes you’re like, I’ve never heard of this company. And it’s a startup. But you know, we’ve seen a record number of IPOs, last year looks like we’re gonna pass that here in 2021, for biotech, and drug development. So things are really getting quite interesting. So lots of different ways to find and discover new companies.

Dan Kline  10:38  There is nothing worse than a virtual conference. I appreciate everyone for trying, but boy, do I love being in person and getting to know you know, one hour, one seminar, a keynote or something. But Simon, I know you’re going to one next week, a tech conference, we could talk about that a little bit later, but I just find it. This is one area where in the pandemic, nobody has figured that out.

Apologies to the folks at Zoom or other virtual platforms, Steve, how does it work for you, you live in an area where you probably actually own a big net. But that is not our wide net? That is probably not how you cast your net? That is probably just for salmon fishing, or other things you could be doing.

Steve Symington  11:15  Yeah, it’s funny, because I’ll travel and people be like, Oh, you’re from Montana. Do you have internet? Do you have cars and laundry machines? I’m like, come on

Dan Kline  11:24  The answer’s no.

Steve Symington  11:27  I was working on machine learning technology 15 years ago here, but I take more of a top down approach to my investment, kind of radar, right? I’m looking at kind of bigger picture factors, I’m, I’m looking at enormous industries that are maybe ripe for disruption. And finding the companies that are trying to do that, or maybe emerging industries with the few early leaders in those spaces. So yeah, I kind of do that.

But I think maybe more important is something that Matt of touched on even though some of my recommendations can make Matt a little squeamish, right with their risk profiles, but he was talking about he who turns over the most rocks, right, I spend a disproportionate amount of time reading all day, every day at night, like in just just reading, researching, turning over rocks and sometimes these companies that you’ve never heard of, kind of pop up onto your radar and you say, Oh, that’s publicly traded.

Or this is a really interesting business that’s that’s growing, you know, compelling software as a service revenue stream recurring revenue, juicy, gross margins, say sometimes they pop onto your radar. And no, it’s just, it’s a matter of just constant research. Hundreds and hundreds of hours sometimes before you really feel comfortable actually stepping into a business. And yeah, we have the luxury, thankfully of being able to do that as kind of professional investors, we sit home and, and I read a lot of the day when I’m not responding to member emails and so that’s just part of it. It’s just the sheer time and effort

Dan Kline  13:13  Involved in that segues into the next question here. And we’ll go back around the horn in the other direction. And when you decide to look at a company? What do you do first for me, if I haven’t already done this, and it’s a place I can visit, or a product I can hold, I want to hold the product, because let’s pretend you’ve never heard of Apple, and someone says, geez, that’s a great investment. Well, you go out and get an iPhone. And let’s pretend the iPhone works like a Palm Pilot from 1985. You’re gonna go like, ooh, like, That’s not good. Like I’ve used an Android. Now that’s, of course not true. I’m giving a silly example.

But if you don’t like the end product, it’s really hard to make a case for investment. And I know people do. But to me, if what they’re doing isn’t well executed. Now, are there companies that need smoothing out in the execution? Sure, anyone who isn’t Starbucks or Domino’s needs to figure out delivery better, and they’ll probably get there. We’re seeing it at every retailer in terms of like, you know, automated checkout, but the core product is still good. Steve, is there a document for you? is there is there one particular thing you go to first?

Steve Symington  14:16  Sometimes that’s kind of hard, especially with like enterprise software companies or something. Some of my favorite investments and best performing investments, you can’t really hold their product, right? But it’s not a tangible physical thing. But first thing I’ll generally do is just hop on an investor relations page, I’ll find a recent investor presentation, but I’ll also take that presentation with a grain of salt, right? They are trying to convince you to invest in their company and now a lot of times these kind of polished investor presentations, gloss over some of the more concerning risks involved with these companies.

So then you go dig into some of their SEC filings and and their latest annual filings, assuming they’re available and and look it’s the the nitty gritty parts after you’ve kind of looked at their big picture investment thesis, dig into the details right that’s where the devil the devils in the details and and figure out what are any red flags potential risks with their product competitors like those sorts of things. So a great place to start is just to check out an investor presentation just to figure out that absolute bull case before you kind of dive into something that might deter you,

Dan Kline  15:30  Steve, we are not as young as we once were. So please take that with a low sodium grain of salt that that’s a lot of grains of salt we’d be taking because one of the things you see when you read, company delivered research or company delivered earnings reports, or whatever it is, is they’re going to find a way to shade it well, and I can promise you that go back and read any Sears earnings call. And you would think this is the most thriving successful company that just had a little bit of a quarter.

I like to read bear reports after I want to see the person that hates this company, what do they have to say? And if I find what they have to say, like pretty fanciful or stupid, that stupid is a unfair word. Yeah, you know, not something a credible case in my opinion, then that’s going to make me feel much better about it. Maxx, I assume you can’t go out and test the products for most of your companies.

Maxx Chatsko  16:21  No, no, I cannot. So this is great. The other questions that we’re going to go through today actually walk through exactly how I identify companies. So we’re gonna build a cake guys, you’re ready, I actually don’t know how to bake a cake. But so we start off right bottom up,

Dan Kline  16:34  You don’t build a cake, you bake a cake.

Maxx Chatsko  16:37  I’ll do whatever I please. Alright, so we start off with bottom up approach. scientific literature, you read that, it’s important you’re being objective, right? And that’s really what scientific literature is about. So you understand the challenge in the opportunities from there the next layer up, I then look at the landscape. So that’s why companies come in to focus. So I look at who’s doing what, how do they fit in, within these tools and technologies. And specifically, I’m looking for companies that have technology platforms, because it’s easier to recover from failure, it’s easier to scale that.

I’m looking for companies that have durable advantages, makes them easier to navigate the competitive landscape, maybe they can displace some incumbents, I’m also looking for companies that are addressing pain points, very important in science and technology. And sometimes more often, you think this actually bleeds into publicly traded companies. They are companies that have solutions looking for problems, you do not want to invest in those companies, you want companies, they’re actually building solutions to problems. So addressing pain points, something that’s maybe harder to tease out, if you’re not really following specific parts of a field or you know, what’s holding back gene therapy? Where might gene editing go off the rails? what companies are doing things to address that. So I look for companies that are doing those three things.

Dan Kline  17:55  Simon, later in the show, we will talk about making a Red Sox Astros bet. But before we do that, what is the first thing you do when you look at a company?

Simon Erickson  18:04  Yeah, so I like what Steve said, you know, go to the investor presentation first and figure out how that company is making its money. And of course, it’s going to be biased. They’re trying to get investors on board. So they’re going to brag and be very proud about it. But you should be paying attention to what is this company doing differently? What do they want you to know. And Steve also said, you know, if they’re disruptive, that’s another important word, too, is, it’s very hard for a newcomer in these large industries to do exactly the same thing that the largest incumbent players are already doing.

If they’re playing the same game, if I’m going to go out and try to try to compete against Apple, you know, or Micron or Intel tomorrow, there’s no way I’m going to build a fdb in my garage where I can do that. There are some things that companies that are new, that are ahead of the curve are doing differently, that we need to figure out what that is. And so what I tend to do is, in addition to the investor presentations are just fantastic. like Steve said, I’ll go back through and I’ll watch TED Talks, I’ll watch YouTube videos, and I have kind of this catalogue of four years of investor conferences that I’ve gone to that I’ll just go back, and I’ll say, okay, was this mentioned before? Was this technology mentioned before? Is this approach any different than what was being done before?

Let’s look at it kind of from the early adopters, and what they’re excited about, and see if there’s a company that fits the most realistic or efficient approach to tackling this problem. And then kind of the next step is like, okay, what’s the company that’s doing that, that has that has done it really, really well and has grown their revenue and grown their business around that. CrowdStrike (NASDAQ: CRWD) is a perfect example of what did this in cybersecurity is a completely different approach to what the rest of the industry was doing.

Dan Kline  19:38  And that can be tricky to to identify. And that goes back to what Steve said, we all spend an enormous amount of time going through these companies that the one someone mentioned on the members call to me, I probably spent seven, eight hours just reading and there wasn’t even that much. It’s a new company, it doesn’t have all that it’s not a new company. It’s a newly public company. It doesn’t have all that much data.

So you got to look at and read like, magazine stories from that industry interviews with the CEO, I will say and it’s one area to be careful, and we’re gonna get to to Matt and then to Max Lucas’s questions in a minute be aware of the charismatic CEO. I’m not saying you don’t want a company that has a charismatic CEO, that can be wonderful. And it could be really good for your brand. But if someone is charismatic but the business isn’t good, the charisma can cover that up.

So you want to be really, really careful about that it doesn’t happen that often. You know, an example I’ll say, if someone who’s an excellent CEO is actually not even the CEO, the guy who founded beyond meat, which is not a company I believe in, but is one that has done very, very, very well. He can convince anyone, that the most ardent person sitting in a steak house, he can convince them that that’s a great product, you’ve got to look at the numbers, you got to look at the business, Matt Cochrane, what is the first thing you do?

Matt Cochrane  20:53  It kind of depends how I found out about the company. So like, I mean, if I’m, if I’m listening to a pitch from one of you guys, you know, and you guys already wrote your report, or something I like, the first thing I’m gonna do is read your report, like, you know, saying this, like somebody sends me an analyst note or something like that, you know, the first thing I’m gonna do is read that if somebody sends me a ticker, or a company that I don’t know anything about, like, the very, very first thing I do is plug it into, like YCharts or ticker and just look at like, a few numbers really quick.

When I don’t know anything about the company, though, like, pretty shortly after that, I’m going to open up the 10-K and read the business section. And that used to really intimidate me, when people talked about that, like, you should read the SEC filings or read a 10k, I thought it was gonna be a bunch of gobbly goo. And I didn’t understand any of it.

But the business section at the beginning of any 10k where they describe their businesses and what they sell, and how they sell it. And, you know, like they’re competitors, and things like that can be immensely valuable. So that’s the real like, like, if I, if I look, if I look real quick at the numbers, and they interest me at all, or if, you know, I read a report that interests me at all like and I want to find out more about the business. The first real thing I’m going to do is go to their Investor Relations website and, and open up the 10k and read that business section.

Dan Kline  22:11  We’re going to get to Max Lucas’s question momentarily. Matt, everyone, thank you for that. But Simon, before we do that, we probably glossed over the obvious here, and this is the promotional part of the show. But the thing we all missed is we all read each other’s reports and watch each other’s presentations, we have to watch the presentations. But I think we would all also choose to watch those presentations because honestly, the vast majority of my investments are stocks you guys have recommended and I am lucky and I don’t know if you give access to the whole team.

So I am lucky to have access to the 7Investing team I get a free account as someone who works here, and I can look at I’m teasing Of course we all have access. I can read in depth and I also can talk to Steve well you know what you can do? You can talk to Steve too. If you came to our members call at 11 o’clock today, you could have asked questions and people ask questions about some of our picks they also asked questions about some things we’ve all been thinking about and we tend to know what everyone else is working on at least some of it so we’re like oh Steve, we’ll take that Simon we’ll take that.

And there was some suggestions that I jotted down and I’m sure everyone did I went oh that’s what I’ve kind of been on the periphery of, maybe I’ll I’ll take a quick look at it so Simon if someone becomes a 7Investing member in addition to our picks to the massive 3000 plus word write ups with graphics and you know animations and fireworks I don’t know there’s a lot of stuff in our recommendations as well as our video deep dives which are basically fancy PowerPoint presentations where not only do we present the bull case but we can ask the question so I could present a company and Matt knows my space and he could say wait wait what about this What about this competitor juice I don’t like that their CFO when he worked here we have to answer those questions. So Simon what else do you get as a member of 7Investing and how do people join other than driving to my house and dropping some money in my mailbox? I don’t actually have a mailbox so that’s a pretty safe joke to make.

Simon Erickson  24:11  Yeah it’s fantastic points that you made Dan that you know 7Investing at the bigger picture what we’re really trying to accomplish up there is empowering people to make better decisions because we know that investing is very personal and it’s very difficult to say for me to tell Steve what the best pick is for Steve or to tell Maxx with the best pick is for Maxx. We want to create a service that shares information that we’ve done a lot of our homework and we’ve shared that out there but then we leave it up to everyone to pass the torch to them say what’s the best pick for you.

And so just like you said I think that it’s an enormously beneficial the access that you had to the team. One of the best ways is emailing us info@7Investing.com or even on twitter @7Investing. I mean if you’re a member and you say hey, you know, full disclosure, I’m a member I have a question about one of your recommendations. What do you think about this and you send an email, Steve sends those around to every one of us and say, Hey, what do we think team? You know, here’s one of our subscribers that wants to hear our thoughts on things like this.

You don’t get that kind of level of access to a team that’s running an ETF. You rarely get access to that kind of a team that’s running a mutual fund where you’re putting your money into something, and then just letting it ride. I think that 7Investing is more of the teaching a man to fish approach where you try to, we’re really trying to empower people, we’re really trying to show everyone what we look at. And of course, we have a diversity of opinions on this team. It’s been neat. Some of the stocks that we talked about recently, have had perspectives from retail and FinTech and AI and you know, maybe Maxx biotechs are a little different for a lot of them. But you know, there’s different pools that we can play and share ideas and share that with our subscribers, I really love what we’re building here.

Dan Kline  25:47  Yeah, and if you’d like to become a member, it is 7Investing.com/subscribe. It is $49 a month, but more importantly, you can join annually for $399 I always got that price right for $399 a year. And if you are a student, we offer an $84 student membership. If you have trouble getting that to go through if you have a .edu address, it should work fine.

Simon Erickson  26:14  $84 per year

Dan Kline  26:15  Yes, it is not a more expensive membership. It’s a cheaper membership. And part of that is we really get excited about the next generation of investors. I know that you know, four of the five of us on here today have kids of varying ages. And investing is something that look I was late to the game. My son’s account is only a couple of months old when he started working. I made him open an account and some of his paycheck goes into that.

But I’m really excited to talk to teen groups and college groups and sort of share do this in your teens. Oh my god you’re going to be rich by 50 like things can go you truly can get rich slowly and look we are selling expertise, we are selling the homework we do. We are not you know the flashy receiver who catches the 110 yard ball Hey, that happens sometimes you know, but for the most part we are the grind it out and do your work team. And there is not a better team in the business. Legally Simon can’t say that I can say that I have been around a lot of teams.

I have never worked with this level of expertise. I have never worked with people that make me want to be better and make me better every day. Back to the program. We’re going to take a couple of questions from Max Lucas here, a friend of the program, Max says and if you want to pull that up JT, do you guys ever own companies you don’t care about the product I own a cannabis REIT even though I have no interest in cannabis as a product but I believe the sector will grow in a second part of his question is on the same note I love traveling and travel but I’d never owned an airline.

Yeah I am very wary of travel companies for the most part even though I do love to travel I have I have one or two in my portfolio I have two actually in my portfolio. One that has been a pick but yeah just because you love something doesn’t make it investable and I think we’ve actually seen that in the cannabis space quite a bit there are a lot of people who maybe love their cannabis and thought that made it a potentially bigger thing I think we’re seeing a very similar phenomenon in sports betting but Steve do you invest in things that you don’t like?

Steve Symington  28:23  I wouldn’t say things that I actively dislike But yeah, I would say I’ve invested in things and you know hold investments and in companies with products I don’t particularly personally care about right? Take Nutanix (NASDAQ: NTNX) for instance right they’re hyper converged infrastructure company and they focus on you know, kind of back end internet stuff, converging your compute storage and network infrastructure into one.

Don’t particularly care about that personally but it’s a fantastic business and they’re building you know, kind of fantastic recurring revenue streams and I love companies like that. But yeah, absolutely. There’s, you know, I’m always you know, easy to find that it’s not not so much a you know, a Lynch invest in what you know, kind of thing all the time, I don’t subscribe to that, you know, exclusively and I don’t think anyone should,

Dan Kline  29:23  And I’ll take hand raises for Who else wants to weigh in here, but I’ll say, second hand knowledge to me is important. Like, I’m not a great basketball player, but if I’m sitting next to someone who is they can have an opinion on you know, a basketball investment. So I’m pretty sure like if you want to invest in a cannabis REIT, you probably know someone who, who knows that space really well.

And like, you know, some things like real estate and property like from a REIT point of view. There are some really good companies I like I can’t say like I care about their business, but I’m absolutely interested in whether it’s a Simon Property Group or an American Towe. Those are companies that are on my research, neither one is personally holding Simon want to close out this topic here before we move on.

Simon Erickson  30:05  No these are all good points. I mean, like he does a lot of high profile companies like Facebook (NASDAQ: FB), you kind of got people who love it, people who don’t love it, but you can’t, or at least most investors wouldn’t argue that it’s out there. It’s got billions of users, it’s got network effects, I mean, stuff like that. It’s polarizing, the whole market is polarizing, we’re looking to go out and look at his investments as ways to provide returns, I don’t necessarily think you have to love the product or love, even the management team to to find a good investment and actually put money to work into it.

Dan Kline  30:33  And some I struggle with Facebook is a great example. A product I use every day that I don’t own, but I see how good an investment it is and how it should be or like, there’s a lot of them like that. And I know some people are completely agnostic about it, like if it’s gonna make me money, I want it. Whereas I’m somewhere in the middle, and some are absolutely the opposite. So it’s really about your personal style.

Let’s get back to the topic at hand. How do we identify investment here, we have just a few more questions. How important is management? To you, to me, management is the be all end all. I want to not only love the CEO, I want to see a deep bench, I am very wary of a company where if I ask the question, Who is the next CEO? There isn’t either a very clear answer, or four people like a Disney always has, like 10 people that you know that is a contender.

Now the problem is when that’s the case, when someone gets the job, half the rest of those people leave. So that can be a negative, as well. But to me, management is really, really important, which I’m sure Simon is gonna like because I work for Simon. So you know, when you feel management is important. That is big. But Matt, your question is up to you here. How important is management to you?

Matt Cochrane  31:47  Yeah, it’s important, I wouldn’t say it’s the be all end all. Like, I want a competent management team. And I want an honest management team. I want a management team that communicates clearly, I guess those are the three things I’m looking for. Like after that, like I’m much more interested in the business model and and the company like what they do and the products if they have an economic moat, things like that, I think are more important than the management team, as long as they’re competent. As long as you’re honest. I’m good. I’m good with management.

Dan Kline  32:16  Simon, your thoughts on this one here?

Simon Erickson  32:18  Yeah, it’s I take both approaches for this, Dan. I mean, sometimes it’s super important. Sometimes it’s not important. There have been times let me let me give an example to bring this concrete right. Couple of years ago was at a FinTech conference. And they were talking about kind of the precursor to buy now pay later, at the time, they were talking about transparency and finance, but it kind of has turned into bnpl today, this is years ago, and one of the speakers that was really really pushing for this was Maxx Chatsko. I mean Max Levchin. But you know, he kind of the guy that came from Paypal (NASDAQ: PYPL) CTO at Paypal really, really wanted more transparency in the financial industry.

Goes on and really backs the idea of Affirm (NASDAQ: AFRM), the company that today is now kind of one of the poster children of buy now pay later. And he said after a little while, you know, I don’t want to just be a backer of this company. I think I should be the CEO. And of course, everybody is ecstatic about Max Levchin coming in and taking the reins of this company that’s now just done fantastically well in the stock market.

So started at the high level, we saw the industry that needed to change, we saw a company that was founded to make that change. And then like Matt, and you were talking about earlier, Dan, I mean, there are aspects for Affirm that touch the retail industry, which you follow so closely, they touch the financial technology industry, which you know, Matt is all over on top of and then there’s also a huge computer science component of those two that Steve is really on top of, it’s interesting to see things and opportunities like this come together. I think that in that case, I was so excited about Affirm firm because of the leadership of Max Levchin.

Dan Kline  33:47  And travel and healthcare as well which are new. I actually had a very small bill for a trip like a year from now it’s like $84 and Affirm popped up Do you want to and I’m like I just want to see how this works. So I’m paying like $6 a month but what a great way for people to be able to pay for things that they really want to do or I’m dealing with and I’m leaving after the show. My cat may need surgery today and while I could pay for it it is really nice to be able to say oh I’ll spread that really unexpected expense out though boy there is a Simon picl that I wish I had paid more attention to back in the day if you’re a member you will know what I am talking about. Maxx your thoughts on this one and Karen I see your question I promise we will get there.

Maxx Chatsko  34:33  Yeah quickly I just want to point out you know there have been three maxes referenced on today’s episode I think that’s a record so we should all band together and like start a cult or something. Maxx Lucas you know DM me later we’ll we’ll talk about that after the show.

How important is management for me, you know, management’s important for any business you own. But in pre commercial drug development, the science is really what rules the day. It doesn’t matter if you brought back Leonardo da Vinci installed him as CEO. If you’re Clinical Trials aren’t going to be successful if you have a bad development strategy right?

Now good management can help companies to navigate development risks or regulatory risks or commercial risks. But at the end of the day, it’s really all about the science. So when I’m evaluating companies, management’s a box that I check, you know, bad management always counts against the companies, I’m looking at good management. All right, I checked that box. Of course, you know, I want there to be good management, but it’s really not a primary focus for pre commercial drug developers.

Dan Kline  35:35  Apologies for the spoiler, for those of you who did not know that Leonardo da Vinci had died. But yes, he has not been with us for quite a while. Steve, I’ll give you the last word on this one, then we will take Karen’s comment, then we will move into one more question on this area. This has been illuminating. And the reason we’re doing this, again, is seven people, all friends, all work at the same company all approach things sometimes a little differently some times a lot differently. Steve, how does this factor in for you?

Steve Symington  36:06  Management right? So it it’s important, but I agree with some of the other sentiment that we’ve voiced here that it’s not the be all end all right. It The first thing that comes to mind is the old Warren Buffett comment that you should invest in businesses that could be run by an idiot because eventually someone will something to that effect. I’m paraphrasing I also think that that comment, that observation from him takes away from how important good management at the helm actually is.

So I think it’s more important than then that Warren Buffett comment kind of implies with a lot of the businesses that we tend to recommend But yeah, I think you know if they’re competent, honest management team I’m gonna have to be able to trust them to invest in the company. But it’s one of several checkboxes like Maxx mentioned.

Dan Kline  37:12  Incompetence is definitely something you don’t want

Steve Symington  37:15  And dishonesty. Right?

Dan Kline  37:16  Yeah, dishonesty is really it’s all the things you wouldn’t want a friend are also important things to look for, when it is a company. And of course, since we’ve had Maxx, Lucas, Maxx Levchin, and Maxx Chatsko. A shout out to Max Headroom, Cinemax and of course the most important Maxx in our lives, HBO Max, home of Titans, which I have been watching and I’m about to watch Doom patrol, which is in that same universe, and there is Peacemaker, which is a spin off of suicide squad, which is actually a better movie than it got credit for.

We’re gonna we’re gonna take Karen’s comment, but we’re not going to put it on the screen just because there’s there’s something in it. That’s that’s not a big secret, but it’s something we haven’t gone fully public with yet. But it is something that if you’re a member makes our service even cooler, and it will be public relatively soon. McCarran says if you commit daily one half to one hour of focused investing, slash financial time, not double or triple or triple tasking, like listening while working on a farm while working on a farm is very specific. What should a new 7Investor read or do with with the site and all the amazing company information to get going buying stocks. And I would say of course, read everything I’ve written but that is very biased. So I will go to Simon who has sort of put our content strategy together and probably has a better idea on this than I do.

Simon Erickson  38:37  Yeah, okay, so half an hour to an hour a day and you really want to focus in if you are a subscriber, I would recommend reading a couple recommendation reports. Go to the top of our sites 7Investing.com/recommendations, we come up with seven every month, pick, pick two or three, they can probably get through in an hour. Maybe some of the biotech ones will take a little longer than than some of the other reports. But I mean, that’s that’s the most detailed.

That’s actually great if you’re spending an hour on the site every day, that’s fantastic. Go through a couple of reports, and you’ll see what we’re seeing, you have less time than that if you have 20 or 30 minutes even I would recommend listening to our podcast, which of course we published at our live stream to our podcast every day as well. And you know, if you’ve got even more time than that, if you want to spend some good bedtime reading on the site, I would go through the company updates where we really get into the nitty gritty of what’s going on with our previous recommendations.

Dan Kline  39:30  And one of the things that’s really important is we give you lots of different ways to get into our content. So you could go to our recommendations page as a member and just flat out see the list of recommendations, that’s useful. Or you could listen to this show or you could listen to a replay of our members call. You could read the recommendations, but you could also after this show, I’m going to take this and I’m going to cut this up into four or five different pieces. So if you don’t feel like reading the transcript or listening to a 10 minute section, you can just read the 600 word intro I write that’ll Give you the overview of what we said.

We try to make it so whether your visual, whether you like to listen, whether you like a mix of things, you can get to our content. The other thing we do is we do something we call perspectives every month, those are usually public facing and a members only part of that. And Simon asked us a question. And it’s a lot like what we’re doing today where all of us have a different answer to that question where we say, oh, and sometimes I really have to think about how I would answer the question, because it’s not necessarily a question I’ve ever thought about. I’m not always but that’s happened a couple of times, and it really causes you to go, Oh, wait, here’s how I’m actually doing this.

So as a member, I think it’s fair to say, you could spend an hour on our content every day. And I don’t think that’s true, pretty much anyplace else. The amount of writing we do the amount of content and a lot of it isn’t because Simon makes us, it’s because we want to. I have like three things I want to write and you know, there’s no rule saying I have to write them but it’s like, oh, no, this happened. There have been days I got up but they can my days open, I’m just gonna read reports and do research and, and prepare tomorrow’s show and then it’s like, oh, wait a minute, these five things happen, I’m gonna write 10,000 words, we have the freedom to do that. And that is really, really exciting.

We’ll get to a couple more comments in a minute. I just want to go here to sort of my last question here. There’s a couple more on the sheet but we’ve sort of covered them so I’m just gonna go to one more and the question is are there any red flags that for you are always something that causes you to walk away? I would say for me, it’s when a company consistently mentioned something in a quarterly earnings report and then never mentioned it again. I even when things don’t go well if a company says this is our problem, this is how we’re fixing it and the next quarter they go oh god the way we wanted to fix it. Yeah, that was a disaster. Here’s what we’re gonna try. That to me is an honest company because things are going to go wrong, but when the company just doesn’t mention it or this happens a lot in retail Oh wow, our women’s apparel was trending up at the first two weeks of the quarter and then they don’t tell you when the next earnings call how it came out. That to me is a very big red flag I’ll try to figure out to go to all of you We’ll start with Maxx just to shake things up.

Maxx Chatsko  42:18  That’s actually a really good point and what you just brought up with companies that mentioned things and then never bring it back one thing I know I you know, see a lot right now in synthetic biology which is an emerging area for investors is there’s a lot of financial shenanigans going on there kind of always has been right? When you have an industrial biotech process or research and development expenses there’s different ways you can like hide or move around the numbers and costs and make the numbers look a little bit better.

And so far most of the companies in this space kind of do that right we just saw a big big short report that had a lot of truth to it for Gingko Bioworks You know, we’ve seen the similar things with Amorous you know, they’ve had SEC investigations they’ve had to restate multiple years of financial filings and they’re currently actually hiding certain manufacturing costs in certain parts of their income statements and balance sheets so I always really read through the SEC filings and you know, if you understand how to read the balance sheet how to read the income statement, how to read the cash flow statements, you can identify and when things don’t really add up especially relative to what the company’s saying publicly.

Dan Kline  43:22  Steve Symington I’ll let you take this one next.

Steve Symington  43:26  Fraud. That’s something that that’s a big red flag for me is when a business has been caught for those things or you know and even in some cases accused and you’re reasonably confident that that that the accusations could actually hold water but it’s really tough for me you know, there’s been businesses out there that have been caught in fraud your Luckin Coffee’s right where people come back from they still continue to invest in this business and say well you know, they got they got caught and now it’s okay it’s all fine but like I do not trust it takes a lot turn back my my trust if companies actually get caught.

Dan Kline  44:13  And i think i think largely with Luckin Coffee people are saying that the share price went so low there’s no reason to sell it because it might recover and it has to a point so sometimes you own something and it just tanks so badly there’s almost no reason to sell it because. Steve what do you do if a company has fraud but then fully replaces its management because that would actually be the case at Luckin Coffee none of the involved are still there.

Steve Symington  44:39  It’s gonna be a while before I’ll even touch it right I have no problem cutting ties with businesses like that I say nope it’s hard to tell you know how deep sometimes those things go but fraud and in you know really consistent dishonesty right. You see some management teams get caught in those kind of smaller, they don’t they consider your white lies. That that’s tough for me. But that’s that’s something I definitely try and keep in mind, as we’re looking through, those are things that are big, big red flags.

Dan Kline  45:14  Matt Cochrane, you actually worked in fraud, that of course, is preventing it not committing it. Is that an area for you? What is your red flag? What are some of the red flags you look at when making an investment choice? Well, yeah,

Matt Cochrane  45:26  No, I mean, I think fraud would would rank there. I don’t think there’s any investor who would see fraud in the company. All right, don’t worry about it. But besides something that outrageous, like fraud, you don’t want to see – if I invest in a company that I believe has an economic moat, and that economic moat starts eroding. Whether that could be from a disrupter, or a better product, or better service, or just a problem with their own servers that why people are leaving, that should make you like pause. So like, you know, you can take a tech company like Oracle (NYSE: ORCL) and their on site servers that they have proven, immensely sticky with so many customers, and there’s still growing revenue from those.

And yet, you see the cloud growing at a much faster rate. And people you know, new companies starting out they’re not going to Oracle and saying we need servers, they’re going to AWS or, or Microsoft (NASDAQ: MSFT) or Google Cloud (NASDAQ: GOOG/L) thing we want to, to use to use those products. So for me it’s starting to see that kind of economic moat eroding. I think that’s a red flag,

Dan Kline  46:33  Economic moats, and real ones, if you start to see the sharks and alligators dying, that is also a concern. Simon, last word on this before we move to a couple of comments, and then hit our finisher,

Simon Erickson  46:43  Transparency, Dan. How about the next door neighbor of fraud, which of course you should tuck tail and run, if you see any company that’s committing fraud out there. But the transparency is, a lot of companies are kind of hiding some skeletons in their closet, right. And a lot of it is just the way they’re paying their management teams. I mean, like this is where you got to do a little bit more digging, you can always look through the definitive proxy statement to see how executive compensation is structured.

But there’s sometimes great companies, great market opportunity, great technology, they’re taking all the money out of the business and giving it to their own pockets. And if you see something like that is an absolute red flag, Nuance Communications (NASDAQ: NUAN), perfect example of this doing natural language processing, they were doing the dictation the Dragon Dictation for surgeons, you know, when they were doing medical procedures, they wanted to talk rather than write down what they were doing. So it’s a perfect fit for this.

But oh my goodness, Nuance’s executive compensation plan was Egregious, Capital E, with how much money their executives were taking home for not really even doing anything. You know, the metrics were so low, the bar was so low on what they had that Nuance had less than 10% of shareholders approve the executive compensation plan. I’ve never seen that that bad before. That’s absolutely egregious. That’s terrible. That’s, that’s no good for you. As an investor, when all the money that a company is making just go into the pockets of their executive team.

Dan Kline  48:05  You want to see executives make a lot of money, but you want to see it based on incentives, I have never cared if you say to me, my stock is now worth 100 times and the whole executive team are now you know, 10s of millionaires. Well, that’s great, because we all won. But you do have to be careful when sometimes a really good idea becomes a bit of an employment scam, where the goal is just kind of to bleed the company.

That scares me with some of the let’s call them lesser SPACs, the ones where there’s just, you know, really anything in the media space from like a, a bunch of print magazines are getting together and going public. It’s like, ooh, like, I don’t know that you’re seeing that money back and I’m sorry to pick on those companies and maybe there will be good ones in that space. But I don’t usually love to go to the same person. But Maxx Lucas asked a really good question. So we’re gonna go to Maxx and then to Mike and we’ll limit it to one or two people talking but Maxx says, Do you think management? Sorry about that? JT. Do you think management depends more on the business and industry to I don’t know who Walmart CEO is, but I’m pretty sure that company is close to just running on autopilot.

Steve Symington  49:08 I think he means Waste Management (NYSE: WM), by the way.

Dan Kline  49:12  That defeats my entire –

Simon Erickson  49:15  You can make the case with Walmart, Dan.

Steve Symington  49:18  Walmart works too

Dan Kline  49:22  I don’t think in tickers. I think in company names, but I think it actually works for both of them. That could be true, but you don’t know what’s happening behind the scenes. And I’ll give the Walmart example. The CEO of Walmart, whose name is escaping me Matt I’m sure you know it. He empowered Mark Lore to build their whole digital business.

And to do that he had to basically take power away from people who’ve been there forever and it was very difficult. You don’t know if at waste management where they’re moving into more of a sustainable world more of a recycling world. If that CEO it seems like autopilot but he’s actually Engineering a pretty big change in the company. I could be wrong, but sometimes that is something to look for. Simon, I’ll let you weigh in on this one. And then we’ll jump into Mike’s question.

Simon Erickson  50:08  Oh, just I mean it from the Waste Management perspective, too. I mean, waste management is a business that is gonna run itself to some degree. I mean, you’ve got to go out there and make acquisitions, you know, trash routes, and you know, recycling and all the opportunities that are out there. But this is very different than being a super innovative Elon Musk, visionary kind of CEO. I mean, different types of companies need different types of leadership teams, and they need to make different capital allocation decisions.

If you saw Waste Management tomorrow, just plowing all of their money into multibillion dollar acquisitions, that they were going to do space internet or something crazy, then you should run away and turn from that kind of investments totally out of touch with what the company should be doing. So you know, whether it’s an innovative CEO, whether it is a CEO that’s managing the operations of the business, whether it’s a CEO that knows how to do m&a, there’s different needs for different kinds of companies find the one that fits you as an investor.

Dan Kline  51:03  Yeah, and even the most old line company needs to evolve waste management of, you know, 1985 looks nothing like Waste Management. Now, that world has changed. They’re no longer just like dumping your trash into landfills. They’re a technology company, in very, very strange ways. So I actually think being a skilled operator works in a lot of spaces. And I joked the other day with Anirban, that if something happened to Elon Musk that John Legere, the former CEO of T Mobile, could take over. And he just agreed, I’ll be fair to say that, but I think if you’re really good at operating, you can figure it out and you can operate.

I want to take Mike Fee’s question, which we’ll close out with we had another piece, but let’s round the show with this because I want to get kind of everybody’s opinion here. Look for companies that have independent majority on the board of directors. Also, I’m a bit hesitant when I see the CEO of a business is also the president, chairman of the board, etc. this does not bother me. I think there are some benefits when you have an independent Chairman or some board members, but the vast majority of publicly traded companies tend to have power concentrated in one person. A strong board is important, but I’m not so sure I agree on this one. Steve, your thoughts here?

Steve Symington  52:20  I don’t, I’m not that hesitant when I see a president who’s also see, like, I think for me, that speaks to, you know, some founder led companies, you have a CEO who’s also chairman of the board or something. So I don’t I don’t think that’s as much hesitation for me.

Dan Kline  52:40  Yeah, titles are just titles. It’s, you know, Simon can call themselves Lord emperor of 7Investing. But if he listens to Steve, if he listens to us, it doesn’t matter. Like, and I think a lot of places people get hung up on, Disney has often been a case where people have had all the titles, but they also have a really strong board and a relatively short leash, even though they’ve had long term CEOs. Matt, you have any thoughts on this one?

Matt Cochrane  53:07  No, I it depends so much on the company so I wouldn’t make that a rule. It’s something to note, to make a note of, but it really depends so much on the company. I’m investing a lot of tech companies where there’s like, different shares and it doesn’t matter what the other shareholders vote for, because like the, you know, the shareholder rights as far as voting goes are almost non existent. But if I think the company has a great moat, and I think the the the company see the you know, the founders did that to protect their their voting interest in the company. That I’m okay with it. I just think it depends so much. I wouldn’t make a rule out of it. Something to note, something to realize. But but but that’s it.

Dan Kline  53:51  So Steve, we have had our friend D call for you to take a Ricola is Steve, a little bit under the weather has braved through the show today, I was gonna close there. But let’s bring up Mike’s comment. Follow up a comment on his own thing. And he said, everyone should read Dear Chairman by Jeff Graham, and it might change your perspective. Thank you for the reading.

And Simon I thought you might want to comment on Karen’s comment. I know there’s some legal wherewithal because I would say, Dear God, start with us we have the broad interest of individual investors not specifically, can’t be specific, but broadly but Simon, why don’t you thread the legal needle of this question.

Simon Erickson  54:30  Karen. First of all, thank you karen so much for asking this question for you know, this is a safe environment we always want to create for people to ask questions exactly like this one. I’m so thankful that you’re that you’re speaking up and asking your question about investing like this. Your question is for anyone listening in who best teaches a beginning investor, how to actually buy individual stocks and navigate brokerage and retirement accounts. a stupid question I do not think this is a stupid question by the way, but you say what is what is this what the stockbroker or financial planner

Right so a financial planners job is to kind of be more personalized to help you figure out your retirement goals, what you should be investing in how much should be in stocks versus bonds, you know, what’s the value of your home of the other assets? You know what, what, what planning do you have for your children to go to college for anything else that’s going on in your life. That’s where something like a financial planner is extremely valuable.

A stock broker has changed in definition in recent years as we’ve had discount brokerages where people can buy stocks themselves. In fact today, most brokerages Fidelity, whether you’re using Schwab, whatever it is that you’re using out there, even though the newer ones are zero fee brokerages, which means you can no now go out and buy stocks by yourself for no fees at all. If you know what you want to buy, and how many shares of them you do, they’re still brought brokers out there too. If you want a little bit more hand holding a little bit less experienced in doing that, they can certainly do that for you for higher fees.

But for the most part, what we try to do with 7Investing is do the research to say okay, do you kind of know what you want to look for? Do you want to go after a really risky company that might have more upside potential? But there’s also downside because of the risks? Or do you want something that’s really really stable that you can really sleep well at night every single night? Because you know, it’s it’s ironclad, it’s paying out dividend income for you every quarter.

And then we kind of hand it off to you to like your question implies of what do we do with this, you know, if you have a brokerage account set up, you have a fidelity account today. And you say I really liked Maxx’s pick that he recommended for 7Investing in October. Now you can take the next step and say I’m going to dip a toe in the water and buy some shares. And now I’m going to probably follow this company a lot more closely. Because I have a small stake in it personally.

That’s what we’re trying to empower with 7Investing as you get more and more comfortable with this and kind of look at more and more things become more experienced as an investor, it’s going to open your eyes to kind of this long term journey that we’re really trying to create. Thank you so much, Karen for the question info@7Investing.com if you have further questions I will personally respond to them.

Dan Kline  57:04  Yeah, and it is important to know there’s a lot of content on our site about this. How many stocks should I own? There’s no one rule. But it’s a question we’ve all answered. How do I buy a stock? It’s something we’ve covered in our new members call. So if you haven’t been to one of our new members calls and you’re a member, it’s really worth listening to that because we go through like, how do I set up a brokerage? Like how do I pick one and we don’t tell you which brokerage, we take you through how we do it.

I know I’m going to write something in the next couple of weeks about setting up a custodial account, which is something a lot of parents have to do. So all of that information, our different styles is all there and again, we’re not a financial planner, we’re not giving you that specific advice. But we can all tell you this is what I do. And you can say You know what? Like geez my situations a lot like Dan, I really like what he has to say. But I’m a lot more interested in what Steve’s investing in. You can take from here, take from there.

We think we give you the full buffet, including the guy who’s making an omelet, and the guy who’s carving like at least rack of lamb and prime rib, there might be some salmon as well. It is a holiday. With that, I thought this is gonna be a half hour show. This is a really informative Show. I’m really happy we did this. Simon and I are going to be back on Monday and we’re going to be talking about why valuation matters for tech stocks. We had planned to do this like two weeks ago, and Facebook broke and that caused everything to go kablooie. So we have a very planned show that we are going to do.

It takes a lot of people behind the scenes to make this happen. Well, not a lot. It takes JT and Sam. JT Street who directs the show helps us put things together always has great ideas. Sam Bailey does the scheduling as our Director of Marketing does all sorts of things. We wish Anirban and Dana were here with us we understand why they’re not we just like to see them. But for Steve for Maxx for Simon for Matt for JT for Sam for everyone in the 7Investing family. I am Dan Kline, we will see you on Monday.

7investing Operations  58:58 

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