Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Joining 7investing founder Simon Erickson and Lead Advisor Matthew Cochrane to discuss these phenomena is returning guest Bill Brewster, the podcaster extraordinaire who serves as the host of The Business Brew and a co-host of the Value: After Hours.
March 2, 2021 – By Samantha Bailey
The investment world is experiencing a unique cultural moment. Between the frictionless brokerage experience Robinhood offers, the rise of TikTok showcasing 30-second videos of questionable investment advice, and Reddit channels uniting thousands of individual investors at once, investing has never been more accessible to so many. But are the lessons that new investors are taking away from these experiences good?
Joining 7investing founder Simon Erickson and Lead Advisor Matthew Cochrane to discuss these phenomena is returning guest Bill Brewster, the podcaster extraordinaire who serves as the host of The Business Brew and a co-host of the Value: After Hours.
The three first look at Robinhood, the popular brokerage app used by so many new investors. Yes, a brokerage company’s main duty is to act as a middleman that connects buyers and sellers of stocks, bonds, and other assets. But beyond facilitating trades, the three co-hosts discuss several areas where Robinhood seemingly falls far short of ideal:
Cochrane points out that Robinhood does not support Roth or traditional IRAs, two types of retirement accounts that feature extremely beneficial characteristics to American investors.
Erickson takes aim at how the brokerage makes money, through the controversial practice of taking payments for order flows.
Brewster highlights Robinhood’s lack of customer support, telling a powerful personal story that drives the point home.
The three also discuss the Gamestop (NYSE:GME) saga and the driving forces behind it.
They wrap up the conversation addressing Michael Burry’s recent tweets on inflation, including how investors can best position their portfolios to prepare for it.
01:19 – Introduction to Brokerages
06:36 – The (Many) Issues with Robinhood
12:48 – Customer Service within a Brokerage
21:58 – Gamestop, Wall Street Bets, and Reddit
34:58 – Bill’s Approach to Investing
Simon Erickson 0:00
Hello everyone and welcome to this episode of our 7investing Podcast. I’m 7investing founder and CEO Simon Erickson. I’m joined by my colleague 7investing Lead Advisor Matt Cochrane this evening. Matt, how are things in southern Florida out there today?
Matt Cochrane 0:14
We’re staying warm down here Simon. We’re staying warm. We got our daughter celebrating their birthdays this weekend. So we have a new pet in the house – a hamster, and it’s acclimating well,
Simon Erickson 0:26
Staying warm and hanging with the hamsters. I love it. And thank goodness somewhere staying warm in the country, because that certainly was not the case for us in Texas. This has been an interesting year in 2021 on so many different accounts. I think that one thing that is a silver lining for it is that we’ve got a lot of individual investors that want to be more actively involved in the stock market, and so they’re starting to ask questions of “what stock should I buy” and “what brokerage should I set up with” and “how do I actually place trades?” And I think this is a great chance for us to kind of focus a podcast on helping individual investors get up and running. And Matt, we’re really excited to be bringing in one of our friends, private investor Bill Brewster. Also, I’d like to introduce as a podcast extraordinaire. Hey, Bill, thanks for being on the program here with us this evening.
Bill Brewster 1:14
Thank you. Nice to be here with you. I don’t have any hamsters but I am also warm.
Simon Erickson 1:19
Well, Matt, maybe we should start the topic with with brokerages. I’ll hand it to you to kind of talk about as we’re getting started with investing one of the first decisions is which brokerage to set up with?
Matt Cochrane 1:29
Yeah, absolutely. So like, if you don’t know, and you’re starting out, a brokerage account is just what most investors use to buy and sell securities like stocks, bonds, mutual funds, ETF’s. You can transfer money into and out of a brokerage account, much like a bank account. But unlike banks, brokerage accounts give you access to the stock market and other investments. A brokerage company, I guess you could say, their main duty is to act as a middleman that connects buyers and sellers to facilitate a transaction.
Simon Erickson 1:59
Yeah, and Bill, let me bring you in on this one too. Because there’s a lot of different brokerages you can choose from we know that Schwab has been around for years, Fidelity’s been around for years, but a lot of them are kind of going to this zero commission or zero fee model. Thoughts on on what’s going on with brokerages in the industry right now and how this is changing things.
Bill Brewster 2:18
Yeah, you know, I guess my my first impression of the zero fee phenomenon was a negative one, because there’s a lot of papers that show the more that you have turnover, or I shouldn’t say “you,” right, but anyone has turnover in their portfolio, it tends to be negatively correlated with outcomes over the long term, right? So you’re getting closer and closer to trading as you’re turning your portfolio over more often. And by turning it over I mean buying and selling securities more frequently. And the data on trading is less than I think most investors are looking for as far as returns that they realize, right. So my initial reaction was, well, I don’t really like this zero fee thing, because psychologically, it removes this hurdle of “do I want to sell this stock or option or whatever the position is that somebody is putting on?” I guess I have somewhat more in my way of thinking because one of the benefits of Twitter and being open with your thoughts is you hear the other side of an argument if you’re willing to listen. There have been some people that have said that, you know, fractional shares or not charging for order has helped them sort of build at a smaller level position sizes and companies. So I guess I’m a little bit closer to saying maybe it’s not as bad as I thought in the beginning. But I do think that people have to remember psychologically that sometimes the friction of having to think a little bit before you sell something and actually seeing that order commission can create a little bit of a psychological moment that actually improves your results over time.
Simon Erickson 4:10
We definitely embrace long term investing. And just because there’s zero commission cost doesn’t necessarily mean you should be trading. More often you locked in shorter term gains. And if you’re trading less than one year for security, you’re paying a higher tax rate than if you held on to those over time. We also know that a lot of times, I think something I’d like to add to this conversation too, is that there really isn’t any free lunch. If you are setting up a brokerage that is not charging you commissions, they’re still making money somewhere else. Either that or they’re losing a lot of money and it’s not going to be a long term option. But I mean, you’re used to kind of these larger, more established brokerages, the Fidelity’s of the world, they’ve got their own funds that they’re making money off of those from. You’ve got Schwab which has got wealth management solutions that have clients that you know, they’re charging for things like that. There’s other ways that those companies are making money. But we’re also starting to see Robinhood is a popular brokerage that a lot of people are talking about right now. Zero commissions, but that’s not exactly meaning that they’re not making any profits. Robinhood is getting paid something called payment for order flow, which means that it’s not directing those directly to the exchanges. But the orders are actually being settled out by high frequency trading companies. That means that you might not always be getting the exchanges advertising advertised prices for the securities because the spread might not be exactly the same. And so I guess I might want to start this conversation because we’ve seen a lot of chatter about Robinhood this last month, a lot of people are claiming this as the hero of the of the retail investor. But I think that I’d like to at least throw out there there is no free lunch and there’s a lot of things going on behind the scenes.
Matt Cochrane 5:49
Yeah, that’s it. That’s an interesting point both of you are making. like Simon, didn’t you say so? A lot of brokerages now, they’ve gone away from commission fees and they offered $0 trades, but like Simon, correct me if I’m wrong, but weren’t you saying a lot of brokerages actually use payment order flows and things like that. But Robinhood actually gets paid more for these than other brokerages.
Simon Erickson 6:16
It’s a phenomenon that I don’t have a whole lot of insight into why that’s happening. But the rates that they’re getting paid are significantly higher than other discount brokerages who are also doing payment for workflow but aren’t quite getting the same rates. Bill, any thoughts on a payments for flow on Robinhood on rates that are being charged? It’s an exciting conversation right now.
Bill Brewster 6:36
Well, I have many thoughts. I guess for those that don’t know, if you read the news last summer, my cousin in law is the one that committed suicide. So I think that’s part of why I have some standing to be here. You know, I think taking a step back. one of the things that bothers me about Robindood in particular, is they do get more reimbursement portrayed is probably the best way to say it. And they tend to get much higher reimbursement for options than stocks, and they also tend to make money by lending margin. Right? So for me, I see an entity that has all of the incentives in the world that are skewed towards driving people to riskier products. Somebody may say, “well, what’s different about that and Schwab? Well, the answer is Schwab makes their money by sending your deposits, your cash balance, to their bank, and they have like a bank subsidiary. And that’s how they generate their money. Robinhood is strictly there to generate payment for order flow at this stage, and I happen to think that that creates – when you combine some of what I perceive to be the gamification and the brain hacks that are embedded in that program, or I guess, platform or whatever you app, I’m not going to give it the platform designation yet. You know, it just it really bothers me. And when I when I see it named Robinhood, which implies that, you know, it’s taking from the rich and giving to the poor, and I see the behavior that it’s incented to create which, according to all the studies seems to be diverting money actually from the poor to the rich. It offends me from the start. And I just think that on that particular platform or app or whatever I said I’m going to call it I would just really caution people to think of the way that social media can create sort of dopamine hits in your life. Maybe think about whether or not you think your life is better off when you have those dopamine hits. And then think about whether or not those dopamine hits belong in investing, because that product seems to be built to me to facilitate the dopamine hits more than someone like Fidelity. And I can understand why somebody might “okay Boomer” me, but, you know, sometimes investing is not supposed to feel like a game.
Matt Cochrane 9:10
There’s a lot there Bill I would like to touch on. I think you hit on the primary problem. Like I have one problem, well, one of the many, I guess, but it seems like everything they’re incentivized to do is they they’re incentivized to do to encourage more trades to encourage more options to encourage buying on margin and everything like that, and there’s no incentives. And there’s nothing they’re doing to incentivize long term investing. So just from an investing standpoint, and forget even all the other stuff now, but they don’t offer IRA accounts for instance, which is like one of the most beneficial accounts for the vast majority of individual investors. Either a traditional IRA account or Roth IRA, you can make contributions with money. And, you know, the earnings grow tax deferred, right until you withdraw them in retirement. And by not offering these things and instead like, encouraging more trades and being incentivized to do so, you know, just you can kind of see like how they designed the entire app on just more activity, instead of more responsible long term investing.
Bill Brewster 10:29
Yeah. So if I can piggyback on that, you know, you can say, “well, how, Matt, how do they incentivize their bill? How do they incentivize trading?” Well, one way is if your stock moves up or down, what is it 5% a day, they send you a push notification. Now I can understand a push notification for a material news event in your company, right? Earnings, some M&A, something fundamental in the company that maybe you should know about, “hey, here’s some news on your company.” The fact that a stock is moving 5% a day really shouldn’t matter to most people, right? I mean, upfront you do your work, you do your due diligence, you decide, “is this company, a company I want to own?” Yes, price does. I do think like the price can lead the news sometimes. And I agree that there is some signal in some price action. Sometimes I do not agree that people should get push notifications during market hours when their stocks are moving quickly. I think that gets way, way closer to inducing emotional behavior than it does trying to notify people of what’s going on in their portfolio.
Simon Erickson 11:36
Yeah, it makes a lot of sense and to point out to the UK did ban payment for workflow several years ago, because on the basis of, according to the study that the CFA Institute conducted, it was not beneficial for the retail investor – this whole business model, which has become pretty standard. It’s not just Robinhood, but a lot of brokerages are doing it is questionable at best on whether it is actually good to not charge commissions for individual investors. I guess that my my my final comment, I’ll pass it back to both of you if you have one more comment about this is that there are a lot of brokerages you can choose from now. It’s not just the big discount brokerages with the names that we’ve gotten used to and familiar with. But a lot of the smaller ones are doing creative other things to make profits, whether that’s payment for order flow and selling your data elsewhere. Whether that’s providing their own content that is advertising supported, it’s worth getting into the fine print when you’re setting up your brokerage and really understanding whoever you go with, how they’re making their money, and how your trades and your data is being used.
Bill Brewster 12:44
I totally agree.
Matt Cochrane 12:48
Yeah. Another thing I think we wanted to talk about Bill was when you look for a brokerage, you should also look for high touch customer service. But almost inevitably, if you’re a new investor, and you’re setting up a new account, you’re gonna have questions. And I remember I mean, it wasn’t that long ago. I remember calling TD Ameritrade a number of times when I was getting set up, just like questions, they would send me an alert, and I didn’t know what it meant. So I’d call them or I see a charge. And I didn’t know what it meant, and many times I call them in. Sure most of them easy questions, or do I have to stay on hold for, you know, 10 to 15 minutes before I get an answer. Sure. And maybe they couldn’t solve it right away, but it’s always good to pick up the phone and call them. I still have the number saved to my phone today, even though I haven’t called them in years. Customer service can matter a lot when you’re talking about your money. There’s a lot of when you first put your money into a brokerage account. It’s a nerve wracking experience. Like I remember the first time, buying a stock for what for us at the time was a material amount of money. And like, like, almost like my breath being taken away as the stock price would just like bounce up and down. You know, it’s a nerve wracking experience, and it’s good to be able to pick up the phone and talk to someone. I think most of these companies, most of these brokerages, the Fidelity’s, the TD Ameritrade, the E*trades, Vanguard, you know, you can pick up the phone and talk to someone, and that’s important.
Bill Brewster 14:32
Yeah, I agree. I mean, I learned I learned options trading on this platform thinkorswim. It’s now part of TD Ameritrade, this guy named Tom Sosnoff is the guy that started it. He led with education so hard and he leaned into it and there was never a day that I traded with them. And I don’t trade anymore because I was no good at it. I don’t recommend anybody does it. But if you must do it because you have to scratch that itch. I will tell you like now he’s this firm, Tastytrade, I don’t know how they are, I’ve never traded with them. Like I said, I avoid options. But every single time I called them, I had somebody on the phone within three minutes that would walk me through the risk profile of the trade that I was going to put on. And they would ask me what I wanted to do and whether or not I knew what I was doing, what month I wanted to do it in, what my risks were that I was taking – these were people that while I don’t advocate what they were promoting or selling, they took the responsibility seriously. I would really encourage people to to understand, especially with Robinhood, like when you sign on to that, they’re going to give you a stock, I think the reason they give you a stock, it’s probably because you don’t want that stock. And if you want to sell that stock, you figure out how easy it is to just buy and sell a security. And then by the way, to get your stock, you have to click on an icon that looks like a lotto ticket. And then to find out what stock you got, you get to scratch a phone with your finger just like you’re at the gas station. So if you don’t like take a step back and think about what are they trying to set up from the very start. And then you realize they don’t have any phone support, like this a real problem for me. And I just I would really encourage people you’re giving your money to to a custodian, right, they should warrant that responsibility in that trust. This is not just something that you should just give to somebody, right, because it’s your hard earned cash. And I think that as a firm, we should demand as a society that a firm deserves that responsibility. And I personally don’t think they do.
Matt Cochrane 16:43
And Bill like, you already brought up your your cousin. And I know you’ve talked about this before. Would you talk through how that played a factor in the series of events?
Bill Brewster 16:56
Oh, the lack of customer service? Yeah, yeah, I’d be glad to. Um, so this is all in the complaint. I mean, I you know, it’s a lead just but his parents found emails were. So what he did was he sold what is known as a put spread. So he sold a put, and then he bought a lower put. And it’s basically a way to express a view that a stock is going up. But you define the amount of risk that you have in the trade. So he thought that he could maybe lose, save $4,000 on a trade. And he logged on, and he saw his account, set a negative $730,000 balance or something like that. I’m not going to be precise on the numbers, but directionally, that’s a lot of money, a lot of money, right. And at the same time that he saw that he got an email from them, like an automated email that said, you need to bring 100 and I don’t know, $30,000 or $70,000, or something in cash to us by tomorrow. And he emailed back, and he said, “I think there’s been a mistake, can somebody please look into this”, and no one responded. So that I think he sent three emails, and he got no response. And then he took his own life on Friday. And then on Saturday, he got an email saying, “hey, good news, you didn’t actually do anything. It’s all been cleared up”. And you’re talking about options like that stuff settles in minutes, right? Or in a day, right? At the end of the day. It’s a binary outcome with a lot of options. You either make money or you don’t have any money, right? And he thought he had to kill himself to save his family. Like he murdered himself. And, you know, one, God forbid you find yourself in that situation, please reach out to your loved ones. I mean, none of us would have wanted him to do what he did. But you know, the fact of the matter is, you can argue causation in a court of law. If there was a customer service rep, I think he’d still be here. And you know, it’s a it’s just very offensive for me to hear a company say, “well, you know, we’re investing in customer service. And then, Representative Sean Casting calls up the hotline, and it hangs up on him after a 22 second automated message, or a CBS anchor tries to get options approval says he doesn’t have any investing experience. They say, “Are you sure”? He says Oh, just a little and then they approve them? Like, to me that’s not real meaningful change? That’s just lip service.
Matt Cochrane 19:28
Yeah, absolutely. And again, that’s it’s tragic story. Our condolences to you and your family.
Bill Brewster 19:35
But it’s no worse man. But you know, I mean, I’m thankful that his parents allowed me and and not just allowed me but wanted to go public with this because our whole goal is a family is to make sure that no one else’s kid has to go through this and no other family has to live this and I’m hopeful that you know, this is prevented some other tragedies somewhere in the world. But yeah, this is it’s a as bad as it gets.
Matt Cochrane 20:01
It’s an appalling lack of customer service where you send an email to a kid, for all intents and purposes telling him he owes immediately six figures, and to bring that to the table. And then when he tries to respond with a question saying, I don’t think that’s right, and it wasn’t right. And for no response.
Bill Brewster 20:20
It’s funny, Matt. Forget about a kid, my mom is not that financially sophisticated. If you sent that email to her, she’d be freaking out. That’s a lot of money. Like she doesn’t have that kind of money. There’s not that many people do. That’s a big number. So, you know, I mean, I just I think, Oh, we don’t provide customer service, or we think it’s like, you know, enough is just a doesn’t pass the smell test to me.
Matt Cochrane 20:47
Simon Erickson 20:49
Yeah, I think wrapping all that together, it’s very important to know the brokerage you’re getting in a relationship with because it’s probably going to be a long term relationship. And I’ve been on record saying that I think that Robinhood has to completely change its structure within a year or two gets shut down.
Bill Brewster 21:05
What’s ironic Simon is if they did, imagine how much that firm would be worth over the long term. Right? If they did, yeah, if they just did things the right way.
Simon Erickson 21:17
But they’re risking half the business from margin, half of it from payments from order flow. And neither of those is a good long term investing behavior. Yeah, it’s crazy. Bill, I’m gonna switch gears on you, and talk about GameStop and Wall Street Bets, and Reddit and everything else we’ve been hearing about for the last month and a half. And I’m not going to get into the nitty gritty of the trades themselves. And I personally haven’t even been checking the price of GameStop. Lately anyway, so I don’t even know what it’s trading it in the last 20 minutes. But this is an interesting story, because a lot of people this is kind of their first experience with investing in the stock market. Right. their very first introduction is seeing the price of GameStop go up. What was it? Matt? Seven X within a couple of months?
Matt Cochrane 22:05
I don’t know. I think it was more than that.
Simon Erickson 22:09
Right? I mean, imagine the expectations if this is your first experience with the stock market. And so GameStop aside, because, you know, we’ve talked on this program plenty of times, this is for many for at least, our team, we don’t think a great long term investment. But do you think that there is any long term impact to investors from this story? About GameStop? About Reddit? About Wall Street Bets?
Bill Brewster 22:34
Um, I guess what do you mean by long term impact? I’m not trying to be a lawyer on you. I’m just trying to sort of box in the question a little bit.
Simon Erickson 22:41
I did forget, we have a lawyer here in the house. He’s gonna ask the tough questions.
Bill Brewster 22:48
I never practiced
Matt Cochrane 22:50
A lawyer brings us a little credibility.
Simon Erickson 22:53
If you strip it, or if you strip out the price of GameStop, and the trades and the money that’s being made, and then lost on that one stock, is the behavior of investing. And the stock market behavior permanently or at least in for the longer term changed by the story of the last month and a half?
Bill Brewster 23:11
I don’t know. I mean, I think you guys would have a better answer, because you were at the center at the fool of sort of message boards and whatnot. Right? My inclination is to say, probably not. The lesson that I take out of GameStop is there are crazy things that happen sometimes in markets. I don’t think it’s this populist little guy versus the hedge fund. I think that that’s a flawed narrative. But I think it’s one that sells news. So I think it’s one that people are gonna write. You know, it’s a short squeeze. And if people want to see other short squeezes, look up what happened to Volkswagen, and what was it? I think it was 2008. I mean, that was crazy, too. So there are situations where, you know, they’re, they’re not common, but there are situations where a hedge fund or a set of hedge funds sort of gets themselves over their skis and has to cover and there’s like, there’s no shares left, and then the price, who knows where it stops, right? I mean, I don’t know why $400 a share was any different than $800 a share on that stock once it’s absurd, it might as well just, you know, go nuts. I, I think that the idea of message boards and whatnot is nothing new. I do wonder if there’s a little bit more of, you know, like, this is a bull market, and there’s a lot of young kids out there and they haven’t quite, I don’t know, gotten there. You know, whatever. They’re, no one’s handed them anything yet. I guess march was a quick, you know, sort of throw up and in 2020.
Simon Erickson 24:55
They have gone through a downturn you’re saying.
Bill Brewster 24:57
This one, right where we’re like, People really get washed out in the options market. I think a lot of people were close. But then I think they got bailed out. And I don’t know, I would just maybe the lesson that I would, that I would teach people, if I asked to teach anything, is, you know, don’t look at the stock market, don’t look at the price as justification for what you’re doing. Because who knows what the price is going to be? I think, you know, and if you’re not confident in your valuation, something that I’ve really come around to is, if you really like a company, maybe a startup position makes sense. And maybe buying in over time makes sense as you get more comfortable with the story. And then you mitigate your risk by buying in the middle of one of these frenzies. But I don’t think anything has fundamentally changed. Do you guys?
Matt Cochrane 25:48
I don’t know. How’s that for a hot take?
Simon Erickson 25:53
Shopping? I have an opinion on this. I think that we’re going to start seeing a lot fewer hedge funds and smart money and whatever we want to call them. Taking short positions on thinly traded stocks. Yeah, I think that the power the power of the crowd for this, you know, and again, it’s not, it’s not against GameStop. But the reason that there was such short interest that was so high in that company, was there was no clear catalyst of this happening, right. GameStop was selling retail bricks and mortar locations with video games that were 10 years ago, popular and no longer there was no way GameStop was going to increase its revenue, and just completely knock it out of the park of what the expectations were. It was a safe short bet. But it was also a thinly traded company. And when you combine a a high short interest with thinly traded company, you can have situations like this play out. Yeah, but it’d be different. If we’re talking about Apple, if we’re talking about Amazon, we’re not we’re talking about a small company that didn’t have a whole lot of trading activity. And I think that permanently, you’re going to see a lot of people scared to lose their shirt because of exactly what happened with GameStop.
Matt Cochrane 26:57
I do think, yes. To your point, Simon, risk management at hedge funds probably got? Well, especially in those cases, like way too loose. Like I mean, what are you doing shorting a stock? I mean, a bill, you had a Jen Ross, on your podcast, who’s a short seller who talked, it was fascinating. The timing of that podcast bill,
Bill Brewster 27:18
I know that was done.
Matt Cochrane 27:22
Before this goes down, and you have a short seller on your podcast talking about the risk of shorting stocks that like had a lot of short interest and things like that, and that they hear that podcast and I listened to it like a week late anyway. And to hear that, and then like the next was like the next few days for me, I see this happen in real time. And it was an incredible lesson, you know, as someone who does not practice shorting stocks, I’m not too familiar with the the art of it, or the practice of it. And and to see it play out like that. Yeah, I think a lot of hedge funds were loosey goosey with their, with their risk management, for sure. For sure. But Simon on the consumer side, do you think this fundamentally changes anything like with the retail investor?
Simon Erickson 28:04
I mean, to me, the biggest problem, Matt, is that there’s kind of this this casino mentality of the stock market that we’re playing with right here, right, people are not getting into GameStop. And investing for three years, they’re playing the suckers rally, where everyone’s just on social media collectively saying, hold hold, you know, by this by this, we’re all gonna win in this together. And we know that that’s not sustainable, we know that someone is stuck holding the bag at the end. And it’s a matter of time before the dominoes fall, and then the house comes crashing down. I mean, this is, to me, the biggest problem with this store, I like that individuals are more actively investing. I like that there’s power of the retail investor, and there’s information being shared, even if it is for trades that just completely seem out of whack. What I don’t like is that no one is thinking about GameStop, at least in the commentary that I’ve seen about this trade, no one was thinking, hey, I want to stick with this company for the next five or 10 years. Everybody’s saying, Hey, I’m going to get in and I’m going to make I’m going to pay off my student loans within the next 20 minutes. Because this thing’s going to the moon and everybody else has got my back and we’re sticking to them. And that’s just not how the stock market works.
Bill Brewster 29:11
Well, and Simon to your point, I mean, they were doing it through out of the money short, dated call options, which, you know, if you’re just learning the investing, I will assure you that those are guaranteed to pretty much go to zero. Yeah, within like, maybe five days.
Matt Cochrane 29:27
So good money management, I don’t know what you guys are talking about.
Bill Brewster 29:31
Yeah, I mean, so you know, to give people some perspective, you know, I think seven investing probably takes a little bit of a growth year lens, then maybe I take to the market, but our common thread is we all believe in in long term fundamental analysis and buying companies that you can own for the long term. So when we see five day out of the money call options, we all collectively get offended at the same time. So
Simon Erickson 29:58
To build to that point, and don’t have to this if you don’t want to, but you did, you did throw up there that you have a legal background. So a lot of people are tossing out the word manipulation, right? Is this market manipulation, that people are pumping up this thinly traded stock that they’re going to make a lot of money in those short term call options that they’ve got? Do you think the hammer comes down on anyone from this? Or is this just wisdom of the crowds speaking out?
Bill Brewster 30:21
I don’t know. I don’t know. I mean, you know, I, the best way to tell you is, I don’t know the legal technicalities of internet message boards and what is and isn’t manipulation? I can tell
Simon Erickson 30:33
Matt already told me that you do. He said that on the show, you could answer those questions.
Bill Brewster 30:37
I appreciate him talking me up. But he oversold my capability on that one. You know, what I would I would say is there was a moment there, where like I was, I wanted to believe it was the little guy versus Wall Street. I don’t think that’s really what was going on. And, you know, maybe I’m wrong. I haven’t really followed the story recently. But I guess I just I always worried that it was going to be the little guy that was left holding the bag. And, you know, I didn’t like when the trading got restricted on them. I thought that that was changing the game in the middle of it. Even though I don’t like the game that was being played, I sort of figured let the game play out. You know, that was that was the sportsmanlike answer to me. But, you know, again, some of these, you know, some of these brokerages, they were undercapitalized. And that goes to, you know, knowing the game you’re playing. And if you’re playing a game, that sort of, you know, regulatory reasons can change the rules on you. I would argue a lot of people didn’t know the actual game they were playing. And, you know, it’s fun until the rules change. But the rules didn’t actually change. People just didn’t know the rules. And when you have really short dated options that can cost you everything.
Matt Cochrane 31:59
You know, we kind of are at this, like this perfect storm for this cultural moment, though, right? So we have, you have the Robin Hood on one hand, which has made like investing and access to these types of options, like super easy, and they’ve simplified it. And they’ve really eliminated basically any friction, the individual investor has to like accessing these types of trades with an app. And it’s almost gamifying it, you know, to an extent, like you know, it’s a scratch off tickets to win stocks and things like this. And then on the other hand, you have Tick tock, and you know, today, like, I don’t know, if you follow him on Twitter, but Tick Tock investors on Twitter, they always post these videos. And like, at first I thought these can’t be real, these are like parodies. But today, there was like one where it was like a, you know, there was a young female, like saying how to like, get 8% a day and turn $100 into $1,000 within a month, and then 1000 to 10,000. And all it was was was was options and using options to get 8% a day. And all you have to do is win every single time and you’ll be fine.
Bill Brewster 33:04
Can I ask did she know how to win every single time by looking at what happened in the past? Just by the one? That was my favorite one? Yeah, you just this happened last year. So it’s bound to happen next year, like no lady, that’s not our world.
Matt Cochrane 33:16
You just buy the stocks that go up? Come on, Bill.
Bill Brewster 33:19
Yeah. What have I been doing my whole life? Right,
Matt Cochrane 33:22
right. It’s so easy. And then, and then you also have these things like Reddit and Wall Street bet. And it’s like, almost like you mix them all together. And it’s like you just have this perfect storm of like, of where more than ever before you have these individual investors like, I don’t know, more than ever before. Before, you know, you have this moment of Yes, people are interested in the stock market, and they’re getting like totally the wrong lessons out of all of it.
Bill Brewster 33:48
Well, that’s why they you know, could use a service to guide them through some of these things, I think and one thing that we did say that was somewhat as a joke, when we said you know, buy stocks that are going up, I do think it’s important to acknowledge that momentum actually is a persistent factor. So over the short term, at least stocks that are going up tend to go up but I would not recommend that solely as a strategy. I would recommend finding a trusted group of advisors or individuals that can help you navigate the market.
Simon Erickson 34:18
Preferably seven of them.
Bill Brewster 34:22
That’s right. Maybe if they give you seven ideas a month. I don’t know
Matt Cochrane 34:26
For a low affordable price.
Bill Brewster 34:28
I have no idea where can I find such a thing? Do you guys have any idea?
Simon Erickson 34:33
If we find one we will let you know. Okay, good. You know, speaking of strategy, let me let me ask you to bill because you you have mentioned to me that your strategy as an investor has changed quite a bit over the last couple of years right you’re talking about options at first and kind of trading and didn’t love that I know that you kind of self identified more as a value investor for a little while there but you’re getting where there are speak tinglies teachings of growth investor that are coming into the picture every now and then as well.
But I guess to frame this, you know, we saw the NASDAQ selling off today and a lot of the conversation was around interest rates. The T bills increased. I don’t know the specifics right off the top of my head, but they went up quite a bit over the 10 year Treasury note. And a lot of conversations are saying, okay, is inflation on the table? are a lot of tech companies and their valuations stretched? Because interest rates have been near zero for so long. And so bill is somebody who’s seen a bunch of different styles of investing, whether that’s value growth, or however else you want to define the different ways that you can be an investor, what is your thoughts on inflation and the valuation of the market? And how are you approaching investing? Personally for you,
Bill Brewster 35:49
You’re asking me questions I don’t have answers for. I like this. So I’ll weasel my way. And then answer and please no one listen to it.
Simon Erickson 35:57
I’ll ask Matt Cochrane next to me
Bill Brewster 36:00
So I think that you know, you put a gun to my head and say, answer this right. I would say, I think that people that so first of all, if inflation takes off, and the tenure goes to 4%, everything’s coming down. Right? Like, I mean, your discount rates are too low today versus where they’re going. That’s I don’t think that’s what expectations are currently. So yes, I think you could see a pullback. On the other hand, the thing that I can’t get my head around when it comes to sort of like tech versus sort of more of the capital intensive. So in thinking industrial company, if you’re listening to me talk, the tech, I don’t see how tech is going to be as hurt by inflation as some of those industrial companies, because when they have to replace their machines, they’re going to have to buy the steel, that the inflation is going to hit. And tech, I think you’d have a hard time convincing me that the labor that goes into the tech sgma. So sales, general and administrative administrative costs, like those people are already getting paid a lot. And there’s already a lot of demand for those engineers. So they’ve sort of had wage inflation and been able to sort of block that right there. They’ve performed well in the face of paying people more now, do those people demand even more if inflation is 4%? I don’t know that I get there with that. And on top of that, now we’ve got this distributed workplace, I would argue maybe tech is looking at deflationary costs, even if inflation comes in. So I just can’t quite get myself to say inflation is the boogeyman, the tack, I do think discount rates are going to, you know, you are going to have lower valuations across the board, I think if everybody has to sort of put a higher cost of capital out there, but I would almost argue that the dispersion will get even bigger and I know that some of my value brethren are gonna like really not like that. I said that, but
Simon Erickson 38:08
It was an interesting podcast,
Bill Brewster 38:10
I know. They’re gonna say that I turned on them. It’s not I’d say on the value investing podcast I’m on to To be fair, I’m not trying to hide. The other thing that I would say is I’m not convinced this isn’t one big inflation head fake, that goes away. And everybody sort of wants inflation to come because they feel like it should come because there’s so much spending, but I’m old enough to remember 2009 and 2010 when gold just ripped and everybody was terrified that inflation was coming and it didn’t now you have a sort of a different fiscal policy right? Because we’re putting money into people’s hands that will actually spend it so maybe there will be more money flowing through the system that’s known as like the velocity increasing that’s very possible but ultimately, that’s going to go to corporations coffers. So I expect earnings to be really big these next two years I think we’re primed and the trends in housing are really good and housing if you think about all the trades people that are required to build houses the multiplier and you know all those people get paid all those people spend money they spend money at Home Depot also like I don’t know, I think we’re gonna have a booming economy if you if you really asked me so. I’m not that worried about inflation. Famous last words.
Simon Erickson 39:30
What do you think Matt Cochrane inflation valuations? What’s your take on everything?
Matt Cochrane 39:34
I don’t know.
Simon Erickson 39:36
The right answer.
Matt Cochrane 39:39
I have no idea. Um, you look is it possible for sure. Like, is this something like, ah, like, I think you should keep an eye on it be concerned about uh, yeah, um, like that being said. I mean, I think there’s ways to like position like certain investments. I agree with bill that like asset light Companies will generally fare better than asset heavy businesses, and where do you find asset like businesses? That’s, that’s tech. That’s the you know, that’s where you find it. Um, you know, it to Bill’s point. I mean, since the end of Bush’s second term, we’ve been going into a lot of debt and paying for it, basically, by printing money and lowering interest rates with a vengeance. You know, and I remember the same the same, I remember that time, like, I thought for sure, we were gonna see inflation, you know, and we haven’t we haven’t for for 12 years. Um, so, you know, I think generally, like, does this change anything? Like how I invest or anything? Not not terribly too much? I mean, you know, I think there’s certain ways to play it. And I think probably the best way is asset light industries. I mean, you think of a company like Microsoft. Right? And that’s, that’s maybe one of my favorite companies, it, you know, is inflation, if inflation goes up? Can they raise the price of Microsoft Windows or office 365? Or, or Microsoft Teams or, or the price of their clouds to match inflation? I don’t think they have a problem with that in any way whatsoever. You know, and, you know, they don’t even they don’t even print the discs that Windows comes on anymore. You know, there’s like, what material do they buy, you know, that they have to buy that the price is gonna go up, maybe besides labor, and these asset like businesses, I mean, yeah, they pay their employees a lot. But generally speaking, you know, revenue per employee is really high at these types of companies. So, you know, they don’t have a lot of frontline workers like a Walmart does, you know, just just picking a company. You know, they’re never gonna have that many employees. So yeah, they have some, and they’ll have to, like, maybe they have to do hike up their wages a bit. But, I mean, does that materially affect Microsoft, as opposed to, you know, an asset heavy business? I don’t see it, you know, so. I guess that’s where I stand it. Could we see it? For sure? Because I don’t know. I don’t know. Like, I thought we were gonna see it 12 years ago, though, and we haven’t we haven’t seen it in 12 years. So maybe not. And tech is deflationary anyways, right. I mean, like tech is a deflationary force on the economy. And we’re seeing a lot of technical innovation. The last 10 years IV software is eating the world. Right. So and I don’t think that’s that trend is stopping anytime soon. So I think you already have the macro deflationary, like pressure on the economy as a whole. So I don’t know. I don’t know. But like, it doesn’t really change too much. How I invest, at least not yet.
Bill Brewster 42:47
Yeah, I’d like to note real quick that somebody is talking at the screen right now. It’s screaming Well, what do you guys think about lumber prices? What about Bitcoin? What about gold? Like, I get it? I really do get it. I guess what I would say is some of that I think is a temporary supply shock because of COVID. And then the other thing that I would say to myself is, well, what about education costs? And what about health care costs? And what about childcare? And I had a conversation I’m gonna plug my own podcast real quick, The Business Brew, holler.
Simon Erickson 43:18
Anyway, subscribe. Anyone listening, subscribe to that podcast.
Bill Brewster 43:23
I had a conversation with this guy, Nacho Sinhala. And he’s a really thoughtful guy. And I tend to be more of an Austrian school like at heart, I like sound monetary policy. I like that stuff. But he’s like a modern monetary theorists. And, you know, what you can’t say when you listen to him is that he hasn’t thought about the issues. And he’s just got a different take on it. And he’s like, Look, all the inflation is coming in supply constricted industries that have artificial constraints. Once you can actually not have an artificial constraint. You can’t find inflation anywhere. It’s all deflation.
Matt Cochrane 44:01
Can you like, pretend? Maybe I did. Maybe a listener doesn’t understand that Bill, like, maybe drill down on that, like the artificial constraints a little more?
Bill Brewster 44:12
Yeah. So it goes to globalization, which is, you know, the, the outsourcing of our labor pool for the most part and tech, right. So if there is sufficient supply, the forces have been in general to take things take prices down in something like education, where there’s a finite amount of universities, and the debt is guaranteed by the government. Like there’s all these adverse incentives and people sort of haven’t really figured out that maybe there’s another way, you know, that that creates sort of this artificial pressure on lifting prices, but again, go into tech being deflationary. Google is now accepting applications outside of our universities. If that sets a trend All of a sudden universities are not like the end all be all. Education is gonna get deflation. Like it just is right? Because it’s not going to be this race of Oh, my kid has to go here or whatever. So it’s just it’s a, he would argue I’m not sure that I’m there on it. But it was more convincing than I thought I thought that I would say, I think, you know, this is going to be an argument, I turned myself, after I said, Wow, that was actually really nice discussion. He would argue that, you know, demand is the problem, there’s just not sufficient demand right now to satisfy all the supply in the world. And when that happens, prices come down. And I’m not convinced that he’s wrong.
Simon Erickson 45:46
But I agree, great points on both sides. I mean, tech is certainly an industry that sees deflation, it’s amazing to me that Amazon can continue growing Web Services at 40% a year and still capture 30% operating margins off of that, Oh, and by the way, everyone that’s running their, their software applications on the cloud on Amazon is still capturing 80% plus gross margins. I mean, there’s plenty of deflation as the cost of that are benefiting the entire industry in that migration happens. I tend and, Matt, your point is a great point too, about the large companies have the pricing power anyway, that they can pass that along to the consumers even if inflation does kick in. So the large tech platforms like Microsoft, no problem. I think that you know, Bill, for me, who is a guy who did some time in the valuation investing trenches as well, I think that the name of the game in valuation or in value investing was always you looked at the whack versus the ROI seat, right? What is the return on your invested capital, and that has to be higher than the cost of that capital, the weighted average cost of capital, and you capture the spread between that right, you want to get larger and larger and get cheaper rates. So you can go out and buy retail bricks and mortar locations, or chemical plants or land or whatever it was in these capital intensive industries that are supply constrained, as you mentioned, but I think that that equation, in the digital world that we’re living in, is less important than the comparison of lifetime value to upfront acquisition costs, both of those discounted to the present value, where the game now is the the, the angle of the hypotenuse of the triangle, if you’re looking at the growth curve of a business over time, is increasing, right? businesses are growing faster and faster, because they’re capturing so much of that upfront. And the lifetime value of these recurring revenue businesses makes it more and more attractive to just spend the money to acquire up front. And for me, it’s kind of a combination, if you would have value and growth investing, we both talked about we’re fans of, of tech, in this in this market climate that we’re in right now. But I think that continues because I think the name of the game, if you’re doing the financial analysis for a business, it’s not just about raising a bunch of money at the lowest rate possible anymore to buy assets. It’s about those long term recurring relationships that are built on top of a tech stack.
Bill Brewster 48:14
Yeah, no, I think that’s right. You know, I guess like where I have some doubt in my head is when the current cash flow is this low and the valuations are as high as they are. There is a part of me that says, boy, you got to be right for a really long time. But that’s somewhat mitigated by tech does tend to trend towards winners, at least from what I’ve seen.
Simon Erickson 48:44
Bill Brewster 48:45
I wish I came on here and sold you guys a big inflation story, you’d probably be given, like, way better for likes and clicks and stuff people love and inflation, you know, Hawk, but
Simon Erickson 48:55
Michael Burry, Michael Burry from The Big Short, you know, he’s out on Twitter right now saying, hey, the inflation is coming. And he’s been right on a couple of contrarian calls before so I think it’s coming.
Bill Brewster 49:09
But here’s the thing. So what do you do? Like to me, and I made I mean, I, you know, I’m not a financial advisor, I just run my own stuff. But to me, like that’s an asset allocation question. That’s not a stock question. Right. Like so to to go into some sort of Vout like, what I’m gonna buy an I owned airlines. I understand the airline thesis. I think they’re priced a little bit rich here. But I’m like, I’m gonna go buy airlines because I don’t want to own tech because I’m worried about inflation. Like that doesn’t make any sense to me. Again, I guess you could buy a mining company but I mean, then you’re playing cycles and show me how many people have actually made money in mining. Not that you can’t. My one of my best friends retired on the beach in his 30s because he flipped oil companies. So like you can make money in commodities. I cannot Right, like I just don’t have that skill set. So I just don’t know, even if you tell me inflation is coming outside of a of a capital allocation, sort of like how much bonds and whatever do I want to own? I can’t get myself to buy junkier stocks on an inflation thesis that doesn’t make sense to me.
Simon Erickson 50:22
Well, great points on all topics. Thanks, Bill Brewster for joining our podcast here this evening. You know, Matt, we started with kind of a basic podcast outline of talking about brokerages and how to buy stocks. And then we started talking about inflation and international investing in tech, we’ve kind of covered the whole gamut on today’s show
Matt Cochrane 50:40
Ya know, it’s gonna be a mess trying to write the accompanying pieces
Bill Brewster 50:44
You just have to say it’s all of a sudden 8investing.
Matt Cochrane 50:49
Bill, Bill, Bill real quick. I mean, like, you gave a short plug. But tell listeners about your your podcast and what you’re doing.
Bill Brewster 50:57
I’m super proud of it. Thank you. It’s called The Business Brew. I think it’s really good stuff. It’s long form discussions. So far, it’s been investors, there have been some CEOs, there was a guy in my family that was really successful. He was an operator. I featured him. His name is Jack, Werback. And then I’m going to start to interview more people in the business trenches, because I don’t want it to strictly be an investing podcast, but it is long form a little bit more informal. But I’ll tell you, I mean, some of the conversations are super interesting. I’m really, really thankful to the guests that have come on, and I put it up against anybody’s content. So I appreciate you letting me plug it and I hope that people check it out. I hope they like it in addition to 7investing.
Matt Cochrane 51:49
I’ve never it’s it’s always like at first I have my doubts, because it was like a two hour episode, I think the first episode, like, You know what?
Bill Brewster 51:59
I think a little bit long, you gotta break the rules.
Matt Cochrane 52:02
Well, I even told Bill this, like 40 minutes in there was like a five minute break where they started talking about hunting and stuff. And I’m like, Oh, this might be a rough last hour and a half. But they brought it back around. And I’ve never not been entertained or informed for an entire episode. S
Bill Brewster 52:18
So like that that episode that you’re talking about is this guy, Mike Mitchell. We started out talking about QVC. We made money together on QVC. So it’s fun to talk about. But I think the really cool example that he brought up was when he talked about going through his firm, bought Zales, the jewelry store, and talking about managing through the financial crisis. And you know, like he was really open about what it meant to have to fire people. I mean, when I I don’t have the video because I want people to feel comfortable when they’re talking to me. But when I was watching him talk like he his lips were trembling and his you know, he was like, not crying, but his eyes were teary. Like, it was real emotion. And that’s what I’m trying to marry. Not everything in finance is like roses, and everybody’s on top of the world. Right? So I’m just trying to talk about what life is and tie it to business. So thank you guys for giving me the chance to plug it.
Matt Cochrane 53:11
Absolutely. And Bill is also on Value After Hours every week with Tobias Carlisle and Jay Keller, another great podcast.
Bill Brewster 53:20
Well, thank you to God. But I think I thank you for having me. This is fun. I liked it.
Simon Erickson 53:25
We had a lot of fun. Thanks for chatting with us, Bill. Thanks, Matt,my colleague for being on this episode. And thank you for tuning in to this episode of our 7investing podcast. We are here to empower you to invest in your future. We are 7investing
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