[00:01:42] Clay Finck: I love it. In today’s episode, we’re going to be doing something a little bit different.

[00:01:46] Clay Finck: Daniel and Jake, they’re entrepreneurs and content creators within the investing community. And we decided to bring them on to. Help us take a little bit of a step back and unravel some of the basics for those who might be newer to the show or maybe serve as a refresher for those that aren’t long time listeners of the show.

[00:02:04] Clay Finck: So I think it could also just serve as a really good reminder for many of the listeners and just get back to the basics because it’s so easy to get into the weeds on a lot of this stuff with individual stock investing. And You guys just do a wonderful job simplifying these concepts and making just investing much more approachable, I think to just your common everyday person.

[00:02:24] Clay Finck: So to get us started here, how about we just have you guys talk a little bit about your background and what got you guys so passionate about investing in the first place? 

[00:02:33] Daniel Pronk: Yeah. So my background, I actually have no formal education about finance or anything like that. How I got started investing was just a genuine love for investing.

[00:02:46] Daniel Pronk: I love money. I love numbers. I’ve always been good with numbers. So it’s always interested me. And then previously, before I started my YouTube channel and started creating content, I had a photography business that was growing and producing a good amount of money for me. And it got to the point where I had this money sitting in my bank account and I wanted to put it to work somehow.

[00:03:05] Daniel Pronk: And that’s really when I got started investing and then started off, made a bunch of mistakes investing on my own, which I’m sure we can get into a little bit later, but It really started my investing journey. And I learned by watching YouTube videos about Warren Buffett, Peter Lynch, Charlie Munger, and just listening to all of the lessons that these amazing people had to share.

[00:03:27] Daniel Pronk: And basically using that as my education to get started with investing. And then also reading The Intelligent Investor, which is a very challenging read, especially if you’re a beginner, but there is no better book out there for investing in my opinion. 

[00:03:41] Jake Ruth: My name is Jake. My background is different than Daniel’s.

[00:03:44] Jake Ruth: So I have been a software engineer for a while. I’ve always been into numbers, solving puzzles and things like that. As investors like to say, I had a lot of dry powder on the side from working at startup engineering companies working in New York city. And I always looked at stocks. They were always just confusing to me with my upbringing in the U S education system.

[00:04:02] Jake Ruth: No one really told me how they worked and you could look at the price and go to Yahoo finance or things like that, but nothing really clicked. And where both of our stories start to converge is I was hiding in my New York City apartment from COVID, working from home, watching YouTube videos, and I finally stumbled upon this person named Daniel Pronk.

[00:04:22] Jake Ruth: It finally clicked to me when I watched the playlist he had called Reading Financial Statements for Beginners. Until that point, I really did not understand what made a stock price move. But I always had an understanding of numbers. So my passion, although I was investing before that in just mutual funds and not individual stocks, really got ignited when I saw someone just break down.

[00:04:43] Jake Ruth: Here’s an income statement. Here’s a balance sheet. Here’s a cashflow statement. And here’s how you can value a company’s market cap relative to those financials it’s producing. I’m getting goosebumps as I say this because it was such An amazing huge moment for me that really kickstarted a different path of investing for me to start looking at individual stocks and getting extremely nerdy and passionate about understanding individual businesses, moats, financial performance, management, it was really taking a lot of the things I had done across Solving problems with Rubik’s Cubes, the weird unicycle stuff and coding.

[00:05:17] Jake Ruth: And I feel that all that set me up to just be a huge stock investment nerd.

[00:05:22] Clay Finck: I have a pretty similar background to you guys where a lot of my learnings and lessons came from learning online as well as just making a ton of mistakes on my own along the way. If you guys could rewind the clock and reteach yourself some of these key lessons that you guys talk about and all the content you put out.

[00:05:39] Clay Finck: What are some of the most important things you guys would highlight and tell yourselves if you were to start over again? 

[00:05:45] Daniel Pronk: Yeah, so for me, one of the main things would be to buy a business. and not by a ticker or a stock price behind every stock. There is a real business that is producing cashflow or hopefully producing cashflow for its investors.

[00:06:00] Daniel Pronk: And you are investing in the business behind the stock and that business, what it produces for its investors is how you’re going to get a return at the end of the day. So instead of looking at, Oh this stock is going up today, or what do I think that this stock is going to do over the next week or month?

[00:06:16] Daniel Pronk: Instead, just focus on the business behind the stock. And if the business is going to do okay, then over the long run, the stock should follow it. And as that business grows and makes more money and can return more money to its shareholders, then the stock should follow. And you should see higher returns on your investment as well.

[00:06:32] Jake Ruth: For me, a lot of it comes down to really understanding what you know, and I’m going to try to embody a little Peter Lynch in me right now. If you can’t explain a stock that you own to a five year old, I really don’t think that you should be investing in it. And something that really grinds my gears, especially with Gen Z and Millennials, is we will do so much research on things we buy, experiences, things like that.

[00:06:52] Jake Ruth: And you hear about a stock at a bar or something, and as Peter Lynch says, people just go and throw their entire life savings into it. I’ve seen friends lose money. I’ve lost my own money. Unlike others, I did not give up. And it’s just really important to know that the information is out there. It’s just a little hard to find, and it’s really important to have the self awareness over Understanding what you own, a great way to figure this out is if you buy one or two shares of a stock and you are not sleeping well at night and you are thinking about it all the time, that’s probably a good sign that you should do some more research.

[00:07:24] Jake Ruth: So a lot of what Daniel and I completely nerd out on is really taking deep dives on businesses and like we said before, understanding management, financials, the moat, the future growth of that business, and looking at other companies in the sector to really make intelligent decisions on how to invest that cash.

[00:07:40] Jake Ruth: Now you can’t be perfect. But that’s way better than investing blind because your friend told you that, Hey, we’re squeezing AMC. We’re all going to make a hundred X, just pile your money in there. Don’t worry about it. 

[00:07:51] Clay Finck: Now, when I look back at my own journey, one of the things that really got me hooked on this concept of investing, it was really came back to Alice Schroeder’s book, which is called the snowball.

[00:08:01] Clay Finck: It’s a 700 page massive biography on Warren Buffett. I’m from Nebraska, so I naturally just Hey, how’d this Warren Buffett guy get so rich? So in that book, it talks about how Buffett was raised in Omaha, Nebraska, and he built a fortune for himself by investing in stocks and investing other people’s money in stocks through the partnership that he had early on in his career.

[00:08:21] Clay Finck: And I think back and one of the big takeaways I had in that book was really understanding the power of compounding. Very early on in Buffett’s life, I remember he talked about how whenever he saw a dollar, he always thought about eventually he can make that dollar turn into 10 or even more than that.

[00:08:39] Clay Finck: And that was through harnessing the power of compounding and harnessing the power of investing. When you think about the stock market, it’s pretty amazing, honestly, that anyone is able to utilize the stock market. and then harness the power of compounding through it. And I’m sure you both came through a very similar realization in your own journeys.

[00:08:57] Clay Finck: So how about you talk a little bit about the power of compounding and why it’s so critical for newer investors to understand? 

[00:09:05] Jake Ruth: Yeah. I, Daniel, I think you’re reading that book. I’m going to throw a little. Fun fact in here, going back to investing principles, so the classic example of the power of compounding, since the human brain can’t really comprehend it, or at least that’s what science tells us.

[00:09:17] Jake Ruth: Would you rather have a penny that doubles every day for 30 days, or would you rather take a million dollars? Intuition will tell you that if someone’s asking you that trick question, you should probably take the penny, but it is still really hard to visualize what the outcome of that will be. If a penny doubles every day for 30 days, that will be over 5.

[00:09:32] Jake Ruth: 3 million dollars on day 30, which is, of course, five times the million dollars on the other end of that. 

[00:09:38] Daniel Pronk: Yeah, the snowball is an incredible book. I would definitely recommend everyone read that. It’s really eye opening about Warren Buffett. But compounding is very crucial to understand for multiple reasons, in my opinion.

[00:09:49] Daniel Pronk: So if you understand the power of compounding, It causes you to view money entirely differently. As you said, Warren viewed every dollar as 10 when he was younger, because if he could invest that dollar, it’d be worth 10 years into the future. And if the average person can adopt that mindset, then it will allow you to think more deeply about the money you’re spending today, and what you are spending your money on.

[00:10:13] Daniel Pronk: Because something that may cost you a hundred dollars today could actually end up costing your future self one a thousand dollars. So if you understand the power of compounding and how it really works. Then again, you can just view money entirely differently and hopefully save some more money and just be wiser about how you’re spending it.

[00:10:33] Daniel Pronk: And then also, it’s important to understand that with the power of compounding, it works amazingly well over the long term. And the average person doesn’t need an incredibly high rate of return to become wealthy by their retirement. If you do the math, if you start early enough and putting away money in your 20s or even in your 30s, you only need an average annual return rate of around 8 percent to end up wealthy by retirement.

[00:10:58] Daniel Pronk: So if you can understand that compounding works very well over the long term and you don’t need these crazy high rates of return and taking on this massive risk, then you can hopefully avoid taking on a lot of that risk and avoiding some of the hype or speculation that Unfortunately, a lot of investors go down.

[00:11:15] Daniel Pronk: So I guess the main takeaway there is just you don’t need to chase higher risks through compounding to end up wealthy by retirement. 

[00:11:23] Jake Ruth: I will poke a little bit of fun at us here, Daniel. We might not be the most fun people to date because of this. So I think we’ve had this conversation. You’re out at dinner, you’re with your partner, and your partner wants to order a bottle of wine, right?

[00:11:34] Jake Ruth: And you’re like, okay, the way Daniel and I think about this is. Alright, this 60 bottle of wine, that’s 60 today, what would that be if I would let it compound in a publicly traded wine company, for instance, assuming their financials are great, so it’s a real mindset shift, and something Daniel and I are very against, although we have friends like this, of course we get along with people, but we try to shake it out of them is, Oh, life’s short.

[00:11:57] Jake Ruth: I’m going to go get a Ferrari and spend 800 or 900 on a car payment. When all those people really want to is be rich and have capital to spend, they’re actually taking the actions that are prohibiting that because they’re lowering their own personal cash flow. I would argue that they took time to understand businesses and took time to understand how cash flow worked and combined that with compounding, they’d realize that all the dreams and desires that they had, if they can just sit tight for a second and make some sacrifices, could really be rewarded by changing how they view a dollar.

[00:12:24] Jake Ruth: And just like we said before, Warren Buffett said that he knew a dollar could turn into 10, that is exactly what we’re talking about here. And it is a little bit frustrating seeing the lack of people that think about money that way. It’s one of the people why I gravitate towards this show because you bring on so many great money managers and people who have really mastered the art of compounding.

[00:12:42] Jake Ruth: And the best part about it is there’s so many different angles on going to the stock market. There’s different types of investors. You could be obsessed with small cap companies. You can just be in the index and let that compound and be more passive. That’s totally fine. You could be like Daniel and I and nerd out on individual stocks and gain a really deep understanding of businesses that we could.

[00:12:59] Jake Ruth: Then explain to the five year old as we like to say, so a little bit of a riff on that, but yeah, change how you view money and you can change your life. 

[00:13:06] Clay Finck: Yes, so many good points there. I think the first one, that last point you made, Jake, with people going too far and things like car payments when it comes to investing, it really doesn’t have to be an either or type thing.

[00:13:18] Clay Finck: Either you save like, All your income in live like a bare bones life cycle, or you’re investing. It really, just 10, 15 20 percent over a really long period of time adds up. And I was recently reading Peter Bevlin book, it’s called Seeking Wisdom, and he talks about Charlie Munger’s psychology of human misjudgments in one of these, Misjudgments that people have are these biases or tendencies is impatience.

[00:13:42] Clay Finck: A lot of people are just hardwired to be extremely impatient. And then again, tying into the penny example that you had, Jake, where one penny, if it doubles for 30 days, it ends up being 5. 3 million at the end of 30 days. On the first day, you’re only getting a penny. And then the second day, you’re only getting two extra pennies.

[00:14:00] Clay Finck: But the 30th day it’s doubling. Over 2 million you’re compounding in just that one day. So not only is like the power of compounding amazing from day zero to day 30, you gain so much of that compounding effect, but a lot of the gains of compounding they’re seeing at the tail end. So people might.

[00:14:20] Clay Finck: They might start investing and then they look 1, 2, 3 years and they don’t really see much progress. It’s just, it’s very linear. It’s very incremental. It’s very small. It feels very small, but what they’re missing is it’s a crucial part of understanding that long term compounding effect where you have to put in those early years to really be able to reap the benefits of compounding in those later years.

[00:14:43] Daniel Pronk: Yeah. And I think one of the, I guess you’d call it the problems with compounding as Jake said is. Our brains aren’t naturally hardwired to understand compounding. We think very linearly. At the beginning, when you’re investing the first five years, you may not see that much growth. You almost just have to have faith that the numbers are going to work out, and that all of this stuff that we’re saying here on this podcast, and what Warren Buffett says, Peter Lynch, you just have to have faith that it is going to happen for you at some point in the future.

[00:15:12] Daniel Pronk: And that can be a hard thing to get over. It can be a hard thing to grasp. 

[00:15:16] Jake Ruth: Yeah, and you made some other great points in there, Clay. To clarify the spending of the bottle of wine, I think it is, the balance is the most important part. I don’t think people should live frugally to the point where they’re making sacrifices where they’re having no fun.

[00:15:29] Jake Ruth: Of course, going parabolic in the other direction, you also don’t want to be overspending. So there’s definitely that happy medium. And as, as you said, 10 15 percent I think is great. And before we beat this penny example, a dead horse, I believe, and I’ll have to fact check myself here, around halfway through, so if you go day 0 1 2, once you get up to round 15, I think it’s around 1500.

[00:15:48] Jake Ruth: It’s still like very small. And point being most of it comes in the tail end and the patience is the hardest part because I’ll go even farther on the mind training. I think that society is set up, commercials are set up, all the inputs that we deal with every day from corporations selling product to getting you to live in the now and to spend your money because it drives the economy.

[00:16:05] Jake Ruth: I’m not saying that’s all bad, but unfortunately a lot of people aren’t taught these principles and it leads them to be blind consumers that overspend and then they end up in debt or they end up in really… Unfortunate situations. And it just kills me that a lot of that I really believe could be solved by including courses like this and including fundamental investing principles.

[00:16:25] Clay Finck: So I think when a lot of people they think about investing or they hear other people talk investing, they think that it’s something that’s extremely complex and complicated. I think some people just use all this jargon and it just doesn’t make any sense. So they think maybe they’re just not smart enough to learn how to invest.

[00:16:41] Clay Finck: And I wanted to pull in one of Warren Buffett’s quotes here. He says, investing is not a game where the guy with 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble with investing. So I just want to throw it over to you guys here.

[00:16:59] Clay Finck: What do you think Buffett means by this quote on investment 

[00:17:02] Daniel Pronk: temperament. Yeah. So it’s funny because at the beginning of the intelligent investor, Warren Buffett actually writes the preface to the book. He says something along the lines of the intelligent investor will supply you with the framework of investing, and then it’s your job as the investor to supply the emotional discipline.

[00:17:18] Daniel Pronk: And it’s the emotional discipline that is arguably more challenging than understanding how investing works and the framework of investing. The more you can control your own emotions and have emotional discipline, the more successful you will be as an investor. You can be the smartest person, isaac Newton is a good example, actually. He invested in a South Sea… I forget the name of the company that he invested in, but it was a long time ago. And basically, this company’s stock was going up and up and up. It was the bubble of the time, and he bought into it, bought a little bit, it continued going up, all of his friends were making so much money, so he bought more, right near the peak of the bubble, and then the stock crashed, and I believe he lost something like a million dollars, if you work it out into today’s capital, and then he said something along the lines of, I can predict the movements of the heavenly bodies, but I cannot predict the emotions of people, basically saying that, no matter how smart he was, the smartest guy arguably to ever live, He still could not predict what was going to happen in the stock market or the emotions of the crowd and of the people.

[00:18:22] Daniel Pronk: So having emotional discipline and having that ability to not get caught up in the hype or falling in love with a stock or falling in love with a story and really thinking logically and controlling yourself, I would argue is more important than just simply being smart or having a high IQ when it comes to investing.

[00:18:40] Clay Finck: Yeah, those are all great points. I was actually just recently reading the story of the South Sea bubble with Isaac Newton. He had. Early in the bubble, he doubled his money and he was happy cause he got out and doubled his money in literally just a couple months. And then the emotional side just really hammered in on him where he invested three times the original amount practically at the top.

[00:19:01] Clay Finck: And then within weeks lost 70 percent of his money. It’s really that. Someone really smart can understand when something’s overvalued, but when they see all their friends and all their neighbors just getting rich by literally just hitting a buy button on their cell phone is the way it works nowadays it can be really hard to just sit back.

[00:19:19] Clay Finck: Stick to your own process and not go into processes or investing processes or approaches that really don’t make sense to you. Don’t make any sense logically or fundamentally. And I’m also reminded of Buffett during the late nineties. He was like highly criticized in the media and everyone’s harping on them because Berkshire stock is down 50 percent while all these hot IPOs are doubling overnight.

[00:19:44] Clay Finck: And all these value managers are essentially getting rich just like the South Seabowl scenario. But Buffett, he understood his process. He understood what has worked for him for decades. And he just knew that there’s going to be periods where his approach isn’t going to work for maybe a year, two, three years, but it’s focusing on that long term approach.

[00:20:03] Clay Finck: Not hopping on the bandwagon when every other value manager is doing it. Just really great points there, guys. 

[00:20:10] Jake Ruth: Yeah. One quick thing to add there, investing is so oxymoronic. There’s one phrase in life where they say, Oh, you missed a hundred percent of the shots you don’t take. Just go for it.

[00:20:20] Jake Ruth: Investing is the exact opposite. Talking about Warren Buffett, you could sit there pitch after pitch and just let it go by you. And the fun part is you can’t strike out investing. You can see a thousand pitches and just wait for your perfect one. And it’s one of the things I love most. Daniel and I see this all the time.

[00:20:35] Jake Ruth: It’s what we talk about on our channels all the time. People run towards these hype stocks, these meme stocks, these SPACs. And sure, maybe a couple of them are good, but when you ask them why they invest in it, Usually the answer is, I’m going to buy a Ferrari next month, or I want to get rich, or everyone else is doing it, or come on Boomer, what don’t you see here?

[00:20:53] Jake Ruth: Yeah, I just wanted to add that. 

[00:20:54] Jake Ruth: Yeah, that Warren Buffett example is just perfect. I believe when the tech bubble was also bursting, Berkshire’s stock was rising. So he stuck to his principles, stuck to his fundamentals, and it’s exactly what he writes at the beginning of The Intelligent Investor, is supplying the emotional discipline.

[00:21:11] Jake Ruth: So he supplied the emotional discipline to not chase the hype. Stick to his fundamentals and what he believed in with investing. And yeah, he may have underperformed for a few years, got criticized for it he was missing the big tech wave, whatever. But in the long run just look how it played out.

[00:21:27] Jake Ruth: Look how it worked out for him. So if you do not have that emotional discipline, then you’ll just be attracted to whatever is currently hot or whatever people are currently talking about, and you will not really ever form that core fundamental process of investing that you need to succeed over the long term.

[00:21:45] Jake Ruth: And something that you can actually stick to over the longterm as well. 

[00:21:49] Clay Finck: Since we’re thinking back to how we invested, maybe when we were starting out, I can’t help but think one of the big mistakes I made when I first started investing was just simply assuming that revenue and earnings growth is an amazing thing.

[00:22:03] Clay Finck: And it’s always good. And all three of us know today that this is a very dangerous assumption and can get a lot of investors into trouble. And If this has happened to you, don’t feel bad. It’s happened to me and it’s happened to many other investors. People just see the headline of X company has beats revenues, beats on earnings and just assume, Oh, that’s an amazing thing.

[00:22:24] Clay Finck: The stock should be going up and I should buy into that stock. So can you guys explain why growth is not always good for a business? 

[00:22:33] Daniel Pronk: Absolutely. So I actually have a saying. that I use on our YouTube channels. And it’s that revenue growth is not the holy grail of investing. It’s, as you said, when you first start investing, you think, okay, if revenue is going up, it must obviously mean that this business is growing.

[00:22:49] Daniel Pronk: If the business is growing, that should lead to the stock price growing. And what you’ll actually see sometimes is a business report. It’s earnings, it’s quarterly results, revenues up, let’s say 30%. And then the stock drops 20%. Everyone puts their hands in the airs and says, investing is a scam. This doesn’t make sense.

[00:23:05] Daniel Pronk: This is gambling. So no, what it is a revenue growth is not, again, it’s not the holy grail of investing. And what you need is profitability growth or profit growth. So what I really look for is a business that is able to grow profitably and grow its cash flow or its net income as the revenue is growing.

[00:23:26] Daniel Pronk: I want to see both things growing over time. A good example of a business that grew its revenue and produced zero stock price growth is actually Snapchat. It IPO’d in 2017. Since its IPO, its revenue is up 9x. However, the stock is down 60 percent from its IPO. So there’s tons of examples like this in the market where businesses will grow their revenue massively, but their stocks will not go up.

[00:23:49] Daniel Pronk: And the reason is because these businesses don’t create shareholder value. And what you want is a business that is going to create shareholder value over the longterm and give shareholders something and grow their profits and the amount of money that they can return to them. In Snapchat’s case, it’s not, it’s, I don’t believe it’s producing profits.

[00:24:08] Daniel Pronk: And if it is, it’s a very small amount and they’re just doing so much dilution, diluting their shareholders. So yes, the revenue grew, but they haven’t been able to actually return any of that revenue in the form of profits back to their investors. So for me, I really just want to see that cashflow growing and really understand how is this business going to return that cash back to me?

[00:24:28] Daniel Pronk: Warren Buffett actually says the number one thing that investors should ask themselves. is how much cash can this business produce and return to you as the shareholder. And a business can be growing its revenue, but if it can’t return cash back to me, then it’s not really one that I’m personally going to be interested in.

[00:24:43] Jake Ruth: I like to think of revenue as a massive flowing river. And you can imagine that as this river flows, there’s different parts of the river that branch off and it’ll take some of the river away. So what a lot of people who have not looked into investing before don’t realize is there’s many different lines on the income statement.

[00:24:57] Jake Ruth: And this is all public data that you can look at for companies that’s available online. They will tell you how much of their revenue becomes profit. So we could talk about gross profit, operating profit, EBITDA, et cetera. And each one of those line items, because the business has to pay for employees, expenses, they might be buying office space and things like that.

[00:25:13] Jake Ruth: And all of those are little parts of the stream that go out. So to what Daniel’s saying, Snapchat has a pretty big river, but when you get to the end of it, it is. A little trickle or it’s completely dried up where there’s other companies that are expanding their earnings. And another really good thing to point out here that took a while for me to grasp was the difference between earnings and free cash flow.

[00:25:32] Jake Ruth: I forget if it was 2017 or 2018, but the SEC made a change for how companies report net income, which Daniel and I really are not a big fan of. Basically, one time sales and things like that can be reported on net income. So companies. They can game things a bit. So if you have a one time sale or something like that, that was unexpected, it might look like they had a huge earning speed because the net income can be affected by one time sales and things like that.

[00:25:54] Jake Ruth: That is pretty unfortunate. Where Daniel and I find the most value, although businesses are very multifaceted and you need to look at multiple angles of it, one very important one, as Daniel was mentioning, is the free cash flow. It’s very simply. of all the money that they’re making after they pay their capex, how much of that is actually profits?

[00:26:11] Jake Ruth: Because they could use that to reinvest back into the business. They could pay a dividend, they can do share buybacks. There are so many things they can do there. And at the end of the day, this is a capitalist society. If a company is not making money, they’re going to get money from a few places. They’re either going to have to raise debt, they’re going to have to dilute shareholders by selling shares on the open market.

[00:26:29] Jake Ruth: So it’s really important to watch this and We can go on about this for so long, right? Because you have companies like Amazon that reinvest all their free cash flow back into growth. So it’s not as simple as saying which company has the most free cash flow. That’s why every business is unique and it’s meant to be analyzed individually to really understand where that cash is coming from, what their growth prospects are, etc.

[00:26:51] Daniel Pronk: To expand on that a little bit more, Jake, there are some businesses out there too, where they will spend. There’s one example. I won’t name the company, but it spent something around 100 million a quarter on marketing to grow its revenue. And so that’s 400 million a year that they were spending on marketing.

[00:27:08] Daniel Pronk: Year over year, the business’s revenue grew by, I believe it was something somewhere around 9 million. So you have to think about that logically for a second. Yes, the revenue is growing. It grew by 9 million. However, they spent 400 million on marketing to do that. So as the shareholder, and as an investor, or if you want to even look at this business as if you are trying to buy the entire business, you got to ask yourself, is that a good use of the company’s money?

[00:27:33] Daniel Pronk: And is that actually creating shareholder value? And Warren Buffett actually says that not all growth is equal. And that growth. Can actually be a detriment to shareholders. And that is a perfect example. If they’re putting in all of this money and they’re not really seeing any. actual value creation because of it.

[00:27:50] Clay Finck: Jake, I love the point 

[00:27:51] Clay Finck: you made there where if a company isn’t profitable it’s going to have to pay for its operations in some way, shape or form. If they’re losing millions of dollars. Okay. Where’s the millions of dollars coming from and oftentimes it’s coming from debt or it’s coming from a company issuing shares.

[00:28:07] Clay Finck: And I think a lot of investors don’t realize they’re essentially You know, if the company is not well run, the managers aren’t good stewards of the shareholders capital. Oftentimes you’ll find out that managers are essentially fleecing shareholders by continually issuing shares. And essentially, these new shareholders that are buying these new shares, they’re just funding the operations of the business through these the share issuance.

[00:28:29] Clay Finck: And then these managers, you’ll see they’re making millions of dollars for running a business that isn’t even profitable. And I wanted to tie in a question here to talk about profitability. Daniel, I’ve watched your YouTube channel for quite some time now and I’ve been really enjoying it. And from what I can tell from your approach, it seems that you typically only want to invest in profitable companies and companies that make money and they have a consistent history of doing so.

[00:28:54] Clay Finck: I think this is interesting because a lot of newer investors, they can get sort of a. Get attracted to these businesses that are maybe in their earlier stages. They’re not really designed to turn a profit because they’re investing and building out their market position. They’re trying to gain market share and not so much focus on the profitability in the early stages of their business.

[00:29:14] Clay Finck: So talk to us about. Why you focus most of your time on profitable companies. 

[00:29:21] Daniel Pronk: Yeah. So as Jake was saying, if a business is not making money, then the two main ways it gets money is debt or dilution. These are other people’s money. And Charlie Munger actually calls these businesses OPM businesses, which literally stands for other people’s money businesses.

[00:29:37] Daniel Pronk: They don’t self sustain themselves. They are not organically producing any cash for themselves. So they are constantly issuing debt, leveraging up the balance sheet, putting the business in a more risky financial spot. or they’re consistently selling themselves to the public market and diluting their shareholders.

[00:29:53] Daniel Pronk: So if you do not have a business that is producing any organic profits within itself, then you as the investor have to ask, okay how is it keeping its lights on them? Where is that money coming from? And how close is it to actually producing profits organically? So for me, I Munger says when he says, if it doesn’t have cashflow, just say no, just don’t even go there.

[00:30:15] Daniel Pronk: Because it basically, if a business does not have cashflow, You as the investor are buying it with the hope that it will be able to become cashflow positive or start producing profits for you as the shareholder before they run outta money or need to sell themselves to the public forever or something like that.

[00:30:32] Daniel Pronk: You’re just, it’s just a much riskier bet, in my opinion, when you’re investing, and I think that a lot of newer investors get drawn to these businesses that are losing money because these businesses do have to go out and dilute. Which means that they need to sell their shares to the public market, and they need to sell those shares to new investors.

[00:30:51] Daniel Pronk: So how they do that is they create these very compelling stories, they promote themselves very well to the public. And they create this kind of hype around themselves, and that’s because they need to keep that up to continue attracting capital. So I think that’s why newer investors get so attracted to these businesses, because they’re always trying to sell you something.

[00:31:11] Jake Ruth: I mean, it’s hard to kill a company with no debt. I think that was Peter Lynch, if I remember correctly. Yeah, there’s a couple of companies like this right now. I sold the position of AT& T back in around 2019, 2020. And the reason why I did that is I didn’t really like what management was doing. They did a couple of acquisitions that they ended up selling later for a loss.

[00:31:29] Jake Ruth: Also the amount of debt this company has, I don’t care if the maturities are going out to 2090 or whenever. They’re Debt is bigger than their entire market cap right now. Now, I’m not going to go out and say, sell AT& T. This is a huge business, right? They could have a turnaround. It’s not a call that I’m willing to make on this show, but it’s just really important to be aware of that.

[00:31:46] Clay Finck: Another thing that comes to mind here in thinking about what trips up newer investors, I think a lot of people get lost in the complexity of all these different investing approaches. With thousands of different companies, there’s many different ways. One can be sustainably over a long time.

[00:32:03] Clay Finck: They can be a successful investor. And there’s a lot of big name investors that do this. One investor takes one approach. They do really well. And another investor takes a totally different approach and they do well too. So to use an example within the value investing community, there’s the debate of, should you focus on cheaper valuations or should you pay up for quality?

[00:32:21] Clay Finck: Some investors, they do really well focusing on. Companies that are some of the cheapest companies out there, but they’re trading far below what Buffett would call the intrinsic value. And then there’s other people who would call themselves value investors where they focus on really high quality companies.

[00:32:37] Clay Finck: But at the end of the day, both of these investors, they’re value investors. They’re trying to purchase a company for less than it’s worth. So I’ll throw it over to you guys here. How would you guys describe your investment styles? 

[00:32:48] Daniel Pronk: Yeah. So I personally believe. That all intelligent investing is value investing thing, which I believe is what Charlie Munger has said as well.

[00:32:56] Daniel Pronk: I actually don’t really believe in growth investing versus value investing versus momentum investing or any of those things. I think all of it. And it’s all just investing. And then with that being said, I like to view myself, Jake and I, he might have a different opinion on me, but I like to view myself as more of an opportunistic investor.

[00:33:17] Daniel Pronk: So if I see, for example, if I see a business that’s trading four or five times cash flow, which is a 20 percent free cash flow yield. And I believe that is sustainable and it’s going to return that cash to me if it’s at that price, it’s low enough to a point where. Even if it’s not the most high quality business, simply the free cash flow yield and the amount of cash that can return to me as an investor is attractive.

[00:33:37] Daniel Pronk: Even if that business lowers or it sees its free cash flow declined by 50 percent over the next 3 years, it can still deliver 10 percent to me. So in those situations, I think those can be attractive investments, but on the other hand, I also think that businesses with incredible management teams, very high quality businesses, trading out more expensive valuations can also be great investments over the long term.

[00:33:59] Daniel Pronk: So I, I just try to look for opportunity wherever I believe I have an edge and wherever I think I am being adequately compensated for the risk I am taking on. That’s really what it comes down to for me. I own high quality businesses that I never want to sell. I also own businesses that I think are just ridiculously cheap, way too cheap for me to ignore.

[00:34:18] Daniel Pronk: So I just do whatever I think is going to produce me the most returns at the end of the day. 

[00:34:24] Jake Ruth: As for me, I like to keep things pretty simple. If I can explain a business I own to a five year old, I will not buy it. I love founder led businesses. I don’t really look for just small cap or just large cap.

[00:34:35] Jake Ruth: So some good examples here. I love Google, but the stock price was always very high for me. The price to free cash flow of Google at the end of 2022 dropped to around 18. And the price of operating cash flow is around 12 to 13. That’s when Google was trading for around 80, 90. People were saying stuff like, Oh, chat GPT is going to take away Google search.

[00:34:52] Jake Ruth: That’s where they get all their ad revenue. And it’s important to know where your edge is. So for example, my background is in software. I like to believe that I have a much better understanding of software, where it’s going, how you can make profit off of it, how you can define a moat in software than the average person.

[00:35:07] Jake Ruth: So I take that edge and I. like to invest in companies such as Google where I could easily understand their cloud business, their advertising, look at a lot of their big bets and also understand where AI is going, understanding and seeing where all the consumers and businesses like ours are building on top of their cloud.

[00:35:22] Jake Ruth: I think it just goes to show that you don’t need to pick one single lane. I think it’s more about understanding what you feel comfortable with, having that self awareness and making sure that you do a lot of the research and education beforehand. And I’ll end that with saying we are talking a lot about individual stocks.

[00:35:38] Jake Ruth: There is nothing wrong with buying index funds or ETFs, and I will say that until I’m blue in the face to all my friends, if you don’t have the stomach for investing in companies or analyzing financial statements, you should at least try to learn, don’t tell yourself you can’t, but if you’re really trying and it’s not for you, don’t force it, because as you’re saying, There’s so many different styles, and I think Daniel and I just represent a small slice of a bigger pie for the amount of investing styles out there.

[00:36:02] Clay Finck: They say that the most important investor to study is yourself, and you guys mentioned how you need to study these different approaches and figure out what approach makes most sense to you. What’s the approach you can stick? To let the compounding work for you because if you switch from one thing to another to another for not really good reasons and you’re just chasing what’s hot, then it’s not going to end up working as well in the end and really sticking to something that’s proven and something that’s consistent to improving to deliver that compounding is really important.

[00:36:33] Clay Finck: Now, since you guys are entrepreneurs and you’re in the content creation space, I think you’re pretty good people to ask about mistakes that investors make. So what are some of the biggest mistakes retail investors make in all the work you’ve done? 

[00:36:49] Daniel Pronk: For me, I would say getting caught up in a lot of the hype and a lot of the stuff that is currently working.

[00:36:57] Daniel Pronk: And by currently working the stock price is currently going up. I have seen so many countless examples, especially in 2021 when we were at the peak of the speculative bubble that was going on. There was so many fundamentally poor businesses and they would have their stocks running 500 percent within a few months.

[00:37:16] Daniel Pronk: And on my YouTube channel I’m sitting here trying to be like, these companies actually don’t look that good when you look at the business behind them. And I got to the point where in the comments, people would just say, Oh that doesn’t matter anymore. Valuations don’t matter. The stock is going up.

[00:37:29] Daniel Pronk: It’s going to continue to go up. And I think a lot of newer investors and a lot of people in general. get really caught up in watching what stock price is going to go up and then trying to predict how far it’s going to go and how much money they can make really quickly without actually taking a look at the fundamentals of the business behind that stock.

[00:37:47] Daniel Pronk: And it can be very scary sometimes. And then additionally, I think a lot of newer investors fall in love with stocks. They fall in love with a stock ticker. They, for some reason, get this emotional attachment to a business or to a ticker, and they will just ignore so many red flags that are, if you just take an unbiased look at the financials, there are so many red flags there, but because revenue is growing, because the story is so compelling, because the management is putting on such a great story to the public, they just, for some reason, fall in love with this business.

[00:38:17] Daniel Pronk: It can do no wrong and they just hold on to it forever, even when all the red flags are there, the stock ends up going down. Fundamentals are declining. They just continue holding on and just maintain that hope and love into that business for some reason. So that’s another thing I see all the time. 

[00:38:31] Jake Ruth: Yeah, I think a great thing to remind us of here is people listen to these shows.

[00:38:35] Jake Ruth: They look at great investors and they say, oh, They never miss. That is so not true. And one of the saddest things I see is when you get into investing, you have to have an accepted failure rate. People also make the mistake of putting in too much money and too fast. So the message to the listeners here is you will make mistakes.

[00:38:52] Jake Ruth: You should expect to make mistakes. Make sure that you’re only playing with money that you feel comfortable with at first. And the worst thing you can do is give up before you made a mistake. If Daniel and I gave up after our first mistakes, We would never be where we are today. We’d never be having this conversation with you today, quite frankly, Clay.

[00:39:08] Jake Ruth: And it’s just a really good thing to keep in mind. I’ll repeat something Daniel says all the time in our business that we’re building is one of my favorite quotes that he says, nothing is a mistake. If you take a lesson from it, if you learn something from your mistake, there’s no such thing as a mistake.

[00:39:22] Jake Ruth: They’re just learning opportunities. And that could not be more true. for investing, especially when you’re first starting off. 

[00:39:28] Daniel Pronk: Yeah. To make it clear as well, I was definitely one of those investors who was falling in love with businesses when I first started and I was ignoring all the red flags.

[00:39:35] Daniel Pronk: Definitely lost a lot of my initial capital. But as you’re saying, Jake, you have to take these mistakes or these failures, if you want to call them that and turn them into lessons and then apply those lessons to your future. And then that’s how you can make these failures or these mistakes pay you dividends over the longterm.

[00:39:54] Daniel Pronk: And I’m happy to say that at the time when I first started investing, I actually did what you did or what you were saying, Jake, and I put 80 percent of my portfolio into a very speculative position that I fell in love with. I had no business doing that, and I ended up losing way too much money, probably about 50 percent of my portfolio, and at the time, it was completely demoralizing, but I knew that There is something to this investing thing.

[00:40:17] Daniel Pronk: It can work. I’m just clearly doing it wrong and I need to learn why. So I learned from all of those mistakes. I applied them to my future investing and now they have paid dividends. That amount of money that I lost on that total failure of an investment, I have made back and more on single stocks now.

[00:40:32] Daniel Pronk: Just don’t give up if you have those mistakes. Take the lessons, apply them to your future and allow them to continue paying dividends for the rest of your life. 

[00:40:41] Clay Finck: One item I’ve thought about recently is checklists and in relation to checklists is thinking about if I buy this stock and it were to go down 50 percent over the next month like How would I react?

[00:40:53] Clay Finck: What would I do? Would I sell it? Would I be excited and wanna buy more? If something’s more speculative and you’re nervous about it falling 50%, maybe you shouldn’t be maybe your sizing shouldn’t be as big, or maybe you shouldn’t be entering that in the first place. And another unrelated point is, Jake, earlier you mentioned at and t, and I think about so many investors bought into that stock.

[00:41:15] Clay Finck: Maybe some investors bought in it for really good reasons. And I know a lot of people pretty much only bought it because it had a really high dividend. And next thing they’re cutting their dividend. The stock’s getting crushed and buying it for the dividend ended up being a big mistake.

[00:41:31] Clay Finck: And I think dividends is another really. important thing that a dividend might look really attractive, but oftentimes there’s really a good reason that there’s a lot of wisdom in the way markets price things. A lot of times prices are at where they’re at for a reason. So you have to consider why is the dividend so high and why haven’t other investors picked it up yet?

[00:41:55] Daniel Pronk: Yeah there’s a lot of examples of that. A recent one is actually Intel when the CEO came out and basically said, We’re committed to maintaining this dividend, even while the company’s cash flow, it’s totally gone. It was losing 10 million at one point in the trailing 12 months, and they said that they were committed to maintaining that dividend.

[00:42:14] Daniel Pronk: As the investor, you got to ask how are you going to pay that dividend when your business is losing 10 billion a year? And the answer was they were taking on debt, leveraging out the balance sheet. Now, for me, when I saw that, personally, I thought that was not the wisest fiscal choice. I thought that was actually a very poor fiscal choice that eventually was just going to blow up in their face because what they’re essentially doing is maintaining the dividend with debt, which is ultimately leveraging up the business and its risk.

[00:42:38] Daniel Pronk: And eventually that’s got to stop. And in my opinion, what they should have done is just cut the dividend way sooner and protect the business’s financials and it’s. It’s financial health and not just take on all this debt to continue paying it, which the end result was they ended up cutting it anyway.

[00:42:53] Daniel Pronk: So by the time that they cut the dividend, now the balance sheet is leveraged up. That’s there now. And they could have avoided that sooner if they just cut the dividend and did not take out all that debt. So if you’re taking a look at dividends or you’re attracted to very high dividend yields, just always ask, how is this company going to maintain it?

[00:43:10] Daniel Pronk: Are they able to maintain it? How are they affording it? Because it’s real cash coming out of the business. And if it’s not producing that cash organically, then there’s a problem. And as you said, Clay, the market is actually pretty wise most of the time. So for me, when I see dividend yields get up to 7, 8, 9%, it’s actually a red flag for me because that’s in that range where I’m like, the market’s saying something here.

[00:43:29] Daniel Pronk: That’s a pretty freaking high dividend. Something’s going on here. The market’s doing that for a reason. So yeah, for me, it’s actually a red flag when I see dividends up there. 

[00:43:37] Jake Ruth: Okay. So going back to what you said before, Clay, if you buy a stock and it goes down 50%, what would you do? I will tell you how Warren Buffett would think of this and Daniel and I will never even fill a fraction of his shoes, but we do our best.

[00:43:49] Jake Ruth: So when you buy a business, you must be pretty darn sure that you think that you are getting a good price for that business. So for example, the business is trading at a hundred billion dollar market cap. When you buy that, there should be a very good justification and investment thesis, based on a lot of research that you did, that is a very good price to pay for that business.

[00:44:08] Jake Ruth: If that business falls 50 percent and you don’t want to start buying it hand over fist because of how much cheaper it’s gotten, I think that you should really go back to your original investing thesis and ask yourself why you bought it. And Of course, there’s snags in this, right? We have been saying this whole time.

[00:44:22] Jake Ruth: No one’s perfect. You’re actually wrong a lot of the time. So there might actually be something you missed. So what I think investors should do if they buy a stock and it goes down, it’s a twofold question. One, Did I miss anything here? Was there a part of my research and our investment thesis that I didn’t see?

[00:44:35] Jake Ruth: Let me go back to the books. Let me go back to their financials. Let me understand the thesis as to why other people are selling this. The flip side of that, and this is how the market works, depending on what the stock is, you have huge pension funds in these stocks. You have big money moving around.

[00:44:47] Jake Ruth: People could be buying and selling stocks for reasons that have nothing to do with the business. And that’s why we keep on preaching patience here. When you are a patient investor, and this is what I did with Airbnb, you could ride those market fluctuations and track the valuation and just wait for your buy in opportunity.

[00:45:02] Jake Ruth: I’d say for people that don’t want to watch the market that much, the other thing you can do, which is very popular, look up dollar cost averaging. This is a very calm way to invest. It’s also very good for index funds. It simply just means you allocate a certain amount of money every week or every month, and you just regularly buy into security.

[00:45:18] Jake Ruth: We’re not going to run through the statistics and math here. I think we’d lose most of the audience, but you could look it up if you’re curious. If you run the numbers on the dollar cost average approach, first trying to quote time the bottom, which is very hard to do timing, the stock market in general is a little bit risky and hard.

[00:45:33] Jake Ruth: You end up getting a better average cost usually than the person who’s trying to sell. Because once it falls 30% is it going to fall another 30%? If it fell 15 percent before that, are you going to feel silly because you haven’t bought it yet? And those are all the questions that people don’t realize will run through their head.

[00:45:49] Jake Ruth: And that’s just why I love that question. It’s a great thing to add to your checklist, because you need to run yourself through these future scenarios. It’s a great way to do that. Just another one of those future scenarios. How would I feel holding the stock? 

[00:46:00] Daniel Pronk: Yeah, Clay, I, it’s funny you mentioned the 50 percent question as well, because it’s something that I do myself and it’s something that I tell people on my channel that they should do as well.

[00:46:09] Daniel Pronk: It’s too, they say that in hindsight, everything is 2020. And by asking yourself those questions of how would you react if the stock falls 50% You can try and get yourself some foresight and it helps you develop that emotional discipline and get you thinking about that emotional discipline before that actually happens, because the reality is every investor is going to be down on a position at some point in their life.

[00:46:32] Daniel Pronk: For that not to happen, you would have to buy the bottom on every stock, every single time you buy for the rest of your life. Not gonna happen. If it does, man, okay, but everyone is going to be down at some point on a stock that they buy. So having that foresight and asking yourself these questions can help you avoid selling or becoming extremely emotional when ultimately these drawdowns are going to happen on your positions.

[00:46:55] Daniel Pronk: Something I also do, this is a good example, is when I bought MEDA when it was down below 100 and then I sold it around 190 ish. I got asked all the time if I was regretful that I sold a little bit too early. And my answer was no, because I also did this on myself on the upside. I asked myself, okay how am I going to feel if the stock runs another 25, I asked myself that question.

[00:47:19] Daniel Pronk: And at that point, I was like, even if it runs, I’m okay with this point. I’ve made a good amount of money in a very short amount of time. It’s at the point now where I don’t necessarily think it’s that cheap. So based on everything I believe about fundamental investing and my own investment principle and my initial investment thesis in that business, it all worked out dang near perfectly for me.

[00:47:40] Daniel Pronk: So I got out, I stuck to my principles and the stock ran. I lost out on potential gains, but I was totally okay with it. Because I was asking myself that question ahead of time before I sold the stock. 

[00:47:52] Clay Finck: I think about a lot of investors, they start earlier on in their lives. Maybe they get interested at age 18, 20, 22, whatever it is.

[00:48:01] Clay Finck: Obviously, that can be really dangerous for people because a lot of people jump in, they have no idea what they’re doing, and they’re just bound to eventually lose a lot of money. But on the other hand, I look back at my own journey, and I think about how many of the best investing lessons I learned were just through the mistakes I made you make a mistake, you reflect on it and figure out, okay, where the heck did I go wrong here?

[00:48:23] Clay Finck: So I’d love to get your guys’s take on how does somebody know when they’re ready to get started with stock investing? 

[00:48:31] Jake Ruth: I think that this is a trick question, Clay. The reason why is this is not a zero or one and on or off switch thing. In my opinion, I like to think of things in terms of spectrums.

[00:48:41] Jake Ruth: So we also want to define what investing is here, right? So I think in order to start investing in an index fund or ETFs, that is a lower amount Of education or knowledge someone might need as opposed to going and investing in an individual stock. So investing in an individual stock obviously takes a lot more research.

[00:48:59] Jake Ruth: So a lot of people working in the United States, this is what I’m familiar with, at any company I’ve been with, they had 401 K options and I was able to put money into those 401 k options. You should look at what those holdings are, but they’re generally target funds. They are index funds, things that will move generally with the market.

[00:49:15] Jake Ruth: Those don’t take a ton of effort to really understand. And if you want to be diversified and not stay in cash, that is something that I’m not a financial advisor, but at least in my opinion, I think everyone should at least be looking into. To add some more color on the individual stock investing, which is probably the more important and interesting piece of this, since it’s what we’ve been talking about this entire time, I will speak from my own mistakes.

[00:49:35] Jake Ruth: The things people should know are financial statements. So once you understand financial statements, another great part is valuation. So you hear investors talk about price to earnings ratios, price to free cash flows, all that. That, in my opinion, is the way that you should be looking at the value of a stock.

[00:49:52] Jake Ruth: It’s not the dollar amount the stock’s trading for. It’s not the market cap. It’s looking at the financials that this company is producing and tying it back to its cost. 

[00:50:00] Daniel Pronk: For me, one thing that I’ve seen in my own personal life. is I know people with a lot of credit card debt asking me if they should be getting into the market and if so what stock should I buy, blah, blah, blah.

[00:50:11] Daniel Pronk: I don’t ever tell anyone what to buy, but the overall thing there is I see people with a very high credit card debt trying to invest in the stock market. In my opinion, and mathematically, it actually makes more sense to just pay off all of your credit card debt or all of your high interest debt. Before you ever even think about investing, credit cards, I believe, are carrying somewhere above 20 percent interest rates on them now, so that is a guaranteed 20 percent return that you are getting by paying off your credit card debt, and you are not going to get a 20 percent guaranteed return in the stock market.

[00:50:45] Daniel Pronk: That is Warren Buffett level returns right there. I don’t think a lot of people are Warren Buffett. I think there’s only one Warren Buffett. It’s much easier for you to get higher returns by actually just paying off your high interest debt. Now you can go down the conversation. If you have 3 percent mortgage, yeah, that’s probably okay to keep.

[00:51:02] Daniel Pronk: You don’t really need to pay off your mortgage before investing. So for me, I try to tell people or close to me, just pay off that credit card debt first. It’s setting you back. You’re not going to make up for that debt in the market consistently. It’s just not going to happen. Next thing. I would say people should probably have an emergency fund because if something happens in life, which things tend to happen all the time that we just don’t see coming.

[00:51:26] Daniel Pronk: Life is forever uncertain. No one knows the future. I have a lot of expenses that come up in my life all the time. And if I don’t have a cushion, the emergency fund acts as a cushion between Life’s uncertainties and your investments. So if let’s say you don’t have an emergency fund, you have 50K invested and some 30K expense comes up.

[00:51:45] Daniel Pronk: What you’re going to have to do in that situation is sell your investments to pay off whatever expense came up. And if the market is down at the time. It’s a very bad time to be selling your stocks. It’s actually probably the time where it’s better to be adding to them. So if you don’t have an emergency fund, you’re basically making yourself a victim or a potential victim of volatility.

[00:52:06] Daniel Pronk: So having an emergency fund, having that buffer between license urgencies and your investments, I think is very important. Also, I have a friend right now who is saving up to buy a home. It’s his first house, he’s very excited about it. And he was messaging me asking me, Okay where can I put all this money that I’m saving up to buy a home over the next one or two years?

[00:52:25] Daniel Pronk: In my opinion, I told him, I don’t think you should invest. If you have money that you are relying on, that you absolutely need over the next one to two years, I think it’s a bad mistake to put it in the market. Because again, the market is volatile. There could be some sort of black swan event that happens over the next three years over the next two years.

[00:52:42] Daniel Pronk: Stocks could go down. It doesn’t matter how strong their fundamentals are. The volatility of the market could bring those stocks down 30, 40, 50%. And at that time, when they’re down, if you need to pull that money out to go buy a house, it’s going to be a bad situation. So I think investing money that you absolutely need is a bad idea.

[00:52:58] Daniel Pronk: And that’s the exact same thing I told him. And also imagine imagine if he put his money in the market, lost 50 percent of it, and then had to go and tell his wife that that’s a bad, that’s a really bad situation to put yourself in. Okay. So all those things are covered. Now, when you get into the market, I’ve really tried to simplify my investing down into three things.

[00:53:17] Daniel Pronk: And this is, these are the three things that I’ve noticed all of my top stocks have and the things that I really value. And I did this subconsciously by accident. But then when I took a look at all of my holdings, I found they had these three things in common. They all had strong management teams. So management had a large positions in the company.

[00:53:34] Daniel Pronk: There was a little stock based compensation going on. And they were very protective of creating shareholder value and overall just protecting shareholder value. So strong management is something I really look for now. Additionally, moat. That’s the second M is a moat. I want to make sure that a business has a moat.

[00:53:51] Daniel Pronk: Because moats protect it from competitors and they protect it from invaders. What that also means is that business is more likely to continue growing over the long term. So if a business has a moat, there’s a much higher chance that my investment is going to be protected, even if I am wrong in the price that I bought it at.

[00:54:06] Daniel Pronk: If that business can continue growing over the next 20 years, the growth should hopefully offset my mistake by paying a little bit of a premium for that business. And the third thing I really look for, the last M, is a margin of safety. And I define a margin of safety as a business has to have an earnings yield or a free cash flow yield above what bonds are currently offering.

[00:54:27] Daniel Pronk: Or in other words, that business has to produce more for me than what the risk free rate currently is. The risk free rate tells you exactly what you are getting for taking on no risk. So if the risk free rate, which I think is a 10 year bond yield, If that is giving you 5%, then me, I will not buy a stock if it is not at least offering me a 5 percent free cash flow yield on cost.

[00:54:48] Daniel Pronk: So I want a little bit of a margin of safety there, because if I am buying a business at a 3 percent free cash flow yield when bonds are 5%, then I am actually paying a premium. And I’m getting lower returns for taking on more risk, which I don’t really think makes sense for me. So those are the three M’s that I really take a look at the moat management and the margin of safety.

[00:55:05] Daniel Pronk: And that’s those are the things that I look for in my own investments. And I wish I knew them when I first started, and I wish I knew how to look for them. And the metrics that would give you a hint or give me a hint that those things exist in the businesses that I. 

[00:55:20] Clay Finck: I wanted to mention here that just based on my experience investing in individual stocks especially and even the market overall stock market index funds, whatever, it’s a really humbling experience.

[00:55:32] Clay Finck: I was recently reminded of this study done by The Center for Research and Security prices, and it concluded that since 1926, just 4% of stocks accounted for essentially all of the gains above the US treasury rate. And I think that’s just so humbling to hear that just 4% of companies for outperformance over treasuries, it’s so humbling because.

[00:55:58] Clay Finck: It’s a reminder that capitalism is absolutely brutal. So you might look at a company and think it has a strong moat today, but there’s a decent chance that five, 10 years down the road, that moat may be in jeopardy. It’s also a reminder that over the long run. Almost all businesses are doomed for failure, so it really makes you careful about celebrating when your stock has gone up or celebrating when your business has done well because eventually the odds just aren’t in your favor as an investor, especially when you’re first starting out and you don’t really know exactly what you’re looking for or what your approach is going to be eventually.

[00:56:34] Clay Finck: So I will mention that. On the other hand, I also think that stock investing Especially in individual stocks. It’s such a rewarding experience. At least it’s been for me. It’s taught me a lot just about life. It taught me a lot about human psychology and then just the world in general and you’re in studying businesses.

[00:56:51] Clay Finck: And personally, I just absolutely love it. And I just love that I get to speak with amazing people like you who have very similar passions. 

[00:57:00] Daniel Pronk: Yeah, it’s like a hold and verify strategy. Yeah. So don’t just buy something and then I know the thing is like buy a stock and hold it forever, but the reality is you should hold and verify and make sure that your investment thesis is still intact and just make sure that your businesses are still okay because that stat you shared, Clay, is honestly pretty wild.

[00:57:19] Daniel Pronk: And that basically says that 96 percent of companies are going to lose their moat over the long term and be disrupted. So watch out for it. 

[00:57:27] Clay Finck: Let’s transition here to talk about some of the work you guys are doing. You two co founded a company called Stock Unlocked. So talk about what this tool is and what inspired you guys to start it.

[00:57:38] Daniel Pronk: Yeah. So on the call that Jake and I had when we were not knowingly starting this business, one thing that we really connected on was how the education system does not teach people about investing and then more so even fundamental investing and what actually makes investing work over the long term. So from day one of building Stock Unlocked, we made sure that it was very beginner friendly and had education embedded throughout the entire platform.

[00:58:03] Daniel Pronk: So we have a toggle right on the platform called education mode. You click that toggle and all of these little question marks pop up on every single piece of data. So if you do not know what a piece of data means that you’re looking at, A little check mark or sorry, question mark will pop up beside it.

[00:58:19] Daniel Pronk: You click on that. It has the definition, how to calculate it, why investors use it, how they use it, tips on how to use it. So every single piece of information is well explained in a way that a beginner can understand because that is what we’re trying to. to do is help people learn about investing.

[00:58:35] Daniel Pronk: Additionally, if you are pretty well versed in investing, you can simply just toggle that off. And then the platform is a full on stock analysis and portfolio tracking platform. And one of the great things that we do is something called our insights scoring system. So throughout this podcast, we’ve been talking about looking at the revenue, looking at the profitability balance sheet debt, how is everything doing there?

[00:58:56] Daniel Pronk: How is the management doing? This is a lot of work. Jake and I we started off building spreadsheets. And I would do all this work manually. So him and I basically decided we could just add this into the software. So for example, if a business’s current ratio is below one, that’s typically not a good thing.

[00:59:12] Daniel Pronk: It’s a red flag. So we built the software to just point that out and say, Hey, on the balance sheet, its current ratio is below one. So now instead of going manually through the balance sheet, what I can do is simply just go take a look at stock unlock insights. And it gives me a financial health scorecard of the business.

[00:59:27] Daniel Pronk: breaks down current ratios below one. It’s got a lot of intangible assets. It’s got a lot of debt to EBITDA is very high. And right away within 15 seconds, I can get a full view of all the metrics that I would take a look at as the investor and come to a conclusion very quickly. And it just speeds up the research process and investing so much.

[00:59:45] Daniel Pronk: So we get we’ll see stocks with insight scores of under two, you go and take a look at the insight scores and it’s just like a wall of red. It’s clearly screaming at you like this is a risky business. Right here. They are diluting you. The balance sheet is not good. Revenue is declining. There is a stock based compensation is 200 percent of revenue.

[01:00:04] Daniel Pronk: Yikes so all these things are clearly pointed out on the platform. 

[01:00:08] Jake Ruth: One great analogy here, because we are friendly for beginners and experts is think of a bicycle training wheels. We already, you already talked about clay. You can be 18, download an app. Trading stocks in seconds.

[01:00:19] Jake Ruth: That’s actually generally a great thing. Access to financial markets is great. And if you go back in time before the internet, you need your own broker. When brokerages first came online in 2000, as I’m told, because I was too young to trade at the time, 50 a trade and 20 a trade. So the company’s coming in and lowering this to zero.

[01:00:34] Jake Ruth: That is a really great thing. Like clap. Thank you. What is not a good thing is when you’re given access to that without the tools you need to succeed. So going back to that bicycle analogy. Education mode is like training wheels on a bicycle. You can turn it off or on very easily, and I definitely recommend leaving it on for the newer investors on the site.

[01:00:50] Jake Ruth: Building on top of what Daniel is saying on these insights and what our users really begged us for it was can I search stocks based on these numbers? So we added that feature too. We have portfolio tracking. We have discounted cashflow calculators. We have a tool called Freeform where you can put in as many stocks as you want.

[01:01:06] Jake Ruth: Take whatever financial metrics you want. There’s over 80, and graph them in one single graph. Slide the date range. Look at the compound annual growth rates, highs and lows for all these stocks. One important thing to point out about the insight scores, this is not meant to be a buyer or sell. You need to do more research.

[01:01:21] Jake Ruth: It’s meant to help you save time and screen for businesses and to avoid the things Daniel was talking about, such as the company that’s doing way too much stock based compensation, tons of debt and all of that. 

[01:01:32] Clay Finck: So the insight score, that is something I wish I always had. So kudos to you guys for putting that together.

[01:01:39] Clay Finck: I think it’s super helpful for investors. I also think about I’d love it if we could just narrow a stock down, just do a single number, how good a company is on a scale of one to five. But of course, the world is extremely complex there. You can’t just boil things down to a number.

[01:01:55] Clay Finck: There’s plenty of nuance when you talk about a lot of these things. So how about you guys talk about how you can mix this sort of quantitative factors with the qualitative? 

[01:02:05] Daniel Pronk: Yeah, I definitely agree with you 100 percent that you cannot boil down the quality of a stock. To a single number. I think it’s impossible or next to impossible.

[01:02:15] Daniel Pronk: So it’s very important to recognize that these insights, the insight scoring system is definitely not a buy or sell recommendation. It’s meant to be a quick overview of the key things that most investors look at when they’re analyzing a business. And it’s meant to save you time at the end of the day and give you a quick overview of the things that you would look for.

[01:02:34] Daniel Pronk: So buying a stock just because it would have a high stock and lock inside the score. As someone who made the platform, I think it is a mistake. It simply just cannot cover everything that you need to know. So it’s a great tool, again, for speeding up the research process, but there is… Unfortunately, no real way to know if a business has the strong moat or a durable competitive advantage over the next 10 20 years by looking at any one metric or a handful of metrics.

[01:02:59] Daniel Pronk: As we said earlier, businesses get disrupted all the time, and I don’t think that you’re going to see that in a business’s ROIC immediately or its revenue growth immediately. These things can happen over time. And they can sneak up on you. So definitely, unfortunately with investing, there’s just, there’s always going to be some amount of manual labor that you have to do.

[01:03:17] Daniel Pronk: So coming to understanding the business. What industry is it in? What are its competitors etc. The insight score, again, is just a very good place to start and screen for if the business has the fundamental metrics or aspects that you’re looking for. And additionally, a stock on Stock Unlocked may have an insight score of 3.

[01:03:34] Daniel Pronk: 5, let’s call it. And then you look at another stock with an insight score of 3. 5, and the fundamentals of how those scores are made up can be totally different. So for example, one business can have kind of a trash balance sheet, but still have a 3. 5 score because it’s growing very quickly. or it has a great management team with low stock based compensation.

[01:03:52] Daniel Pronk: So those metrics can offset the bad balance sheet, whereas another company may have a phenomenal balance sheet, 3. 5 score overall, but it has very little growth. Maybe revenue is declining and the management is doing more stock based compensation. So a 3. 5 and a 3. 5 can have totally different makeups of their metrics and how the business is operating, how the management is operating, how its financial health is.

[01:04:14] Daniel Pronk: So it’s not a one score fits all type situation, and it’s definitely something that investors should still consider and look at. And look for the things that they value more and their own investing. One investor may want a stronger balance sheet. One may want more growth. And as Jake was saying, we built a screener that ranks all of these different scores.

[01:04:33] Daniel Pronk: So if you want a business with a perfect 5 score on growth, you can screen for that and put that as a higher priority than the balance sheet, for example. So that’s one way that we can also help. Break down our insights more and help users find exactly the stocks that they’re looking for. 

[01:04:49] Jake Ruth: Yeah.

[01:04:49] Jake Ruth: The whole purpose of this is equipping people with tools that they need to make informed decisions. So whether you go out and still buy AMC or if you buy things on your credit card please just be educated. That’s all we ask for. And these are the tools we wish we had before we went and made mistakes in the market.

[01:05:06] Jake Ruth: And quite frankly, we would have made way less mistakes and lost Money Because This Is Almost More About Avoiding Bad Stocks then Just Finding The Good Stocks Is The Whole Spectrum. So We Wish We Had This. And We’re Really Happy That We Can Build This Software Build Off The Backs Of the Giants Of AWS Stripe Financial Data Providers That Are Now Available That Are Giving Us The Opportunity To Provide This To Consumers.

[01:05:29] Clay Finck: One of The Most Annoying Things For Me Personally In Managing My Portfolio Is Being Able To Look At The big picture, I have my brokerage account, I have my Roth IRA, 401k, those are retirement accounts in the U. S. Then I have other assets that sit outside of those accounts. And I’m sure you guys have ran into the same problem because you actually created a feature that fixes this.

[01:05:50] Clay Finck: You can link in your accounts and track your portfolio. So I’d love for you to talk about this as well. 

[01:05:55] Jake Ruth: What’s really great about the year 2023 is as time goes on, financial data becomes more and more available. So Stock Unlocked is built on the. latest tech, the latest software. And just as you said, Clay, you can come to Stock Unlocked, connect multiple portfolios.

[01:06:09] Jake Ruth: We have a brokerage connection feature. You can reach out to us if your brokerage is not supported and we are supporting more and more every day. Globally, you can use Stock Unlocked to combine all your portfolios into one view. And quite frankly, our dividend analysis, breakdown analysis of your holdings, our tying in of the insight scores, we are always improving this.

[01:06:28] Clay Finck: This last question I have here in the outline is a fun one. If you guys could go back to your 18 year old self and hand them one investment book, which one 

[01:06:37] Daniel Pronk: would it be? Mine would be The Intelligent Investor, hands down, with one caveat that it is a dense and difficult read. Yeah, so it’s. It’s a book you need patience for.

[01:06:49] Daniel Pronk: It’s a book. You cannot really just skim over and you need some stamina to really grasp all of the value that it can give you. It’s actually a book I’ve read eight times now. And every time I read the book, I learned something new. It’s one of those books. It’s definitely one of those books that every time you read it, you learn more and more.

[01:07:05] Daniel Pronk: And I believe that you’ll become a better investor every single time. With that being said, it is a very challenging and intimidating book. So even though I think it is the best book. I actually would start with Peter Lynch’s one up on Wall Street. I think that gives you a great overview of the market, how it works, what to look for in a very digestible way.

[01:07:25] Daniel Pronk: It’s for me, it’s like a warm up to the intelligent investor. So those are the two that I would do. 

[01:07:30] Jake Ruth: I have an interesting answer for you, Clay. So I think the most value I could give to your users here is actually resurfacing a book that was mentioned on the Richer Wiser Happier podcast on this very show.

[01:07:41] Jake Ruth: I think with all investing, money is meaningless if your mind’s not right. And I have complained on this show that part of the education system really does not impart with us Any investment knowledge. I think other knowledge that I put in that category as well is mindfulness, meditation, understanding how the human brain works.

[01:07:58] Jake Ruth: There is a book called the Genie Within, and I would not have heard of it if it wasn’t for the show. I’m getting goosebumps. As I say this, I am 30 years old. I did not really end to mindfulness until later in my twenties, and you don’t need to think of yourself as a meditation guru. You don’t need to vision yourself in robes going to a monastery.

[01:08:17] Jake Ruth: That’s not what this is about. If your mind’s not right, your life’s not right. And if you get money and you’re not in a proper mental state. You’re going to be just as miserable as you were as when you were poor. So it’s a weird answer to what’s the best investing book, where I really believe that if you don’t also have those principles down along with the books that Daniel recommended, you could learn as much as you want about investing, but it’s all going to be for nothing.

[01:08:41] Jake Ruth: There’s lots of other attributes that come in here, and there’s nothing that’s helped me more than really learning to forgive yourself, learning how your brain works, visualizations, calming your mind. As an engineer, and I’ll end this there, there have been so many times where I lay to bed, my mind’s racing, I’ve had trouble sleeping for a while, we’re bombarded with so much input in the world that we live in of advertisements, people yelling things there, yelling things back and forth.

[01:09:04] Jake Ruth: I live in New York City I get it. Do not sleep on those books. Be a genie within. Thank you to this podcast again. Really changed my life. 

[01:09:14] Clay Finck: Daniel, Jake, thank you guys so much. This was amazing. It was a fun chat and I’m sure many in the audience are gonna find it really helpful. You guys are doing amazing work at Stock Unlock and all the content you guys put out on YouTube, so please keep up the great work.

[01:09:29] Clay Finck: It’s very much appreciated. Before we close out the episode, how about you guys give the handoff to Stock Unlock and what you guys are doing and the special offer you guys have. 

[01:09:40] Jake Ruth: We are very excited to give back to the community here. Like we said before, Daniel and I are regular viewers of this show, and there’s nothing we want more than to give back to the audience and the show that’s given so much to us.

[01:09:49] Jake Ruth: We are lowering our already very competitive prices even without this deal. With the code WSB, for We Study Billionaires, just three characters. If you enter that in on checkout, you will get 30 percent off for 12 months. We offer a monthly and a yearly plan, so that applies to both. And it’s worth noting, you can use Stock Unlock for free.

[01:10:10] Jake Ruth: You can make an account for free. We are a non predatory company. run by people not in suits, and you can just go, enter your email. We are not going to ask you for your credit card up front. You can connect your portfolios. You can use 100 percent of everything we’ve built because we’re putting everything on our sleeves and truly believe in the value of what we’re providing.

[01:10:28] Jake Ruth: And again that code is WSB. And we really appreciate the opportunity to come on this show, Clay. It has been nothing short of a pleasure to have this conversation. Just thank you so much. It’s incredible. If you would like to connect with Stock Unlock after this show, you can go to Stock Unlock on YouTube.

[01:10:47] Jake Ruth: We have our own YouTube channel where Daniel and I have a weekly live show. If you are more into a podcast format, we do cross post that to Spotify, Apple Music, where you got your podcasts. You can follow Daniel Pronk on YouTube. He is Canada’s number one investing YouTuber. This is a humble guy, folks. He won’t say it, so I have to say it for him.

[01:11:05] Jake Ruth: Just way too humble. 

[01:11:07] Clay Finck: Guys, thank you so much. It’s been a 

[01:11:09] Daniel Pronk: pleasure. Thank you, Clay. It’s been awesome.

[01:11:12] Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or re-broadcasting.