This new concept of crowdfunded real estate is really interesting. So we’re trying to make real estate investing accessible and understandable to everybody.

Robert Leonard  2:05

What was the big driver in your switch from teaching full time to what you’re doing today?

Matthew Frankel  2:09

It was kind of a natural transition. I love to teach. I love investing so what I’m doing now kind of lets me combine the two especially on things like the podcast that I do. I’m on the Industry Focus podcast, it was just a natural transition. I had been kind of dabbling in investment writing on the side while I was still a teacher.

I was a teacher when I lived in the Florida Keys, which was a very expensive area to live in. Everyone there has a second job and mine was investment, right? So I did that long enough that the Motley Fool offered me full time and I have been doing that ever since. I consider it a form of teaching.

Robert Leonard  2:41

You’ve written hundreds of articles for the Motley Fool since you’ve been doing it. Many of them were covering REITs, which are just real estate investment trusts. So for those listening who may not have heard of REITs before, what exactly is it and how is a REIT different from just traditional real estate investing?

Matthew Frankel  2:58

Most of the REITs that you’ll see are publicly traded. They traded on exchanges just like stocks, but they’re a specialized type of company that’s meant to own real estate assets. But you can’t just own real estate assets and call yourself a REI. You have to meet certain criteria. You have to invest at least three quarters of your assets in real estate, for example.

Also, this is the one that is most notable, you have to pay out at least 90% of your taxable income to shareholders. This is why REITs tend to be great dividend paying stocks.

So there’s a list of requirements they need to meet in order to meet REIT classification and the benefit of if they can qualify as a REIT is that they don’t pay tax on the corporate level.

Most dividend stocks, when a company earns profits, it’s taxed on the corporate level of corporate tax. Then once they’re paid out to investors as dividends, they are taxed again as dividend income, effectively the same income is being taxed twice.

With REITs, there’s no tax on the corporate level. So the only tax you have to worry about is on the individual level, which is a great tax benefit. If you’ve heard that real estate is one of the most tax advantaged investment classes in the world, that’s one of the reasons why. All different forms of real estate investment have their tax advantages. REITs are no exception. Y

Robert Leonard  4:07

Yes, that’s interesting to hear about the tax advantages, because a lot of times people go into physical real estate because of those tax advantages so it’s interesting to hear that you can get it investing in the stock market too, as long as it’s in a REIT.

Matthew Frankel  4:18

I’m a real estate investor too. I have a couple investment properties and in my own area. It’s great tax benefits. My properties made money this past year, but it showed a loss for tax purposes, which is pretty incredible. It’s the only kind of asset class that I know that will do that for you.

Robert Leonard  4:34

Yeah, same exact thing for me. So other than just the tax benefits, why should someone consider investing in REITs? What are some of the other pros and what might be some of the cons?

Matthew Frankel  4:44

Well, it’s also a diversification move, if you will. If you’re a stock investor, when the market goes down, like the past few days, the Dow is down 2000 points pretty much everything is going down. It could be a nice little hedge because real estate doesn’t move with the stock market necessarily.

In fact, a lot of things that drive the stock market downward, like uncertainty will actually lift REITs. When interest rates fall because of investor fears, that’s actually a positive catalyst for real estate REITs. All dividend based investments tend to move inversely to interest rates.

So if you see, say treasury yields fall, you’ll see dividend stocks as a whole benefit. It’s a nice little diversification. It gets you away from just stocks and bonds in your investment portfolio.

The return potential is great for the risk involved because of the tax advantages. It really amplifies the long term reward potential. Over time, over long periods, like decades, long periods of time, REITs have actually outperformed the stock market as a whole, which is pretty impressive, considering the level of risk, in fact that in the 2008 2009 financial crisis, although that was the crash that was caused, in effect by real estate. The real estate index actually outperformed the S&P 500 during that time, and it shows you the relative safety of the asset class.

Robert Leonard  5:56

Some people are arguing that we might be in another bubble in the real estate market. Would you argue that REITs are positioned to continue to outperform if that recession is driven by real estate again, would they outperform?

Matthew Frankel  6:09

It depends, but I caution that we’re not kind of in a different state. If we are in a bubble, we’re in a different sort of bubble than last time.

Last time, it was caused by a kind of predatory lending, just rampant speculation. Right now, the rise, I don’t want to call it a bubble, I don’t really think it is one. But the rise in real estate prices that we’ve seen in the past few years, has really been due to a shortage of available inventory.

In other words, there aren’t enough available homes to satisfy the demand. In my local market, I’ve had trouble buying rental properties because all the good ones get snatched up in a day or two. I don’t know if you’re seeing the same thing up there. But it’s a big supply and demand issue.

Right now, the home builders are really not focusing too much on the lower end of the market, which is where you’re seeing the most supply issues. I don’t think it’s a bubble per se. I think the recovery is about where it should be.

In most parts of the country, we’re just above the pre-crisis peak in terms of real estate prices. So I wouldn’t call it a bubble, but we’re definitely getting up there.

Robert Leonard  7:08

Yeah, I’m in the same boat as you. It’s hard to find any properties local to me that don’t sell in a day or two being on the market. So it is difficult to find rental properties. That’s why I invest mostly long distance for my rental properties, like we talked about before the show, I live in the Boston area, but I invest most of my rental properties in Texas. So I’m able to be able to go out there and find the markets where there are better opportunities, kind of like you do the stock market, similar concept just in the real estate world.

But going back to REITs, how is analyzing a REIT different from analyzing other individual company stocks and someone listening to the show might be doing today?

Matthew Frankel  7:42

Well, I would say the biggest thing you need to learn when you start investing in REITs, from an analytical point of view, is that traditional measures of earnings don’t really translate well to real estate. As you know, as a rental property owner, you have this cool tax benefit known as depreciation that allows you to deduct a certain percentage of your property’s cost every year lowers your taxable income.

Well, REITs can do the same thing.

So the problem is with that is they’re depreciating hundreds or 1000s of properties, and it makes their earnings look artificially low. There’s a metric called “funds from operations,” which is abbreviated FFO, which is the number one metric that any REIT investor should learn.

It adds back in the depreciation costs and makes a couple more little real estate specific tweaks. It gives investors kind of the better picture of how much money these companies are actually making one common.

I call it a rookie mistake to look at a REITs earnings. In a traditional sense, it’s net income and say, “Oh, this is trading 50 times earnings, these REITs are too expensive.” That’s kind of the wrong way to look at it.

You should be looking at FFO as the earnings of the REIT world. That I think is the biggest analytical tip I can give you.

Robert Leonard  8:50

Is net income after shareholder distributions, or is that before net shareholder distributions?

Matthew Frankel  8:57

Net income? That’s a good question. That income is before shareholder distributions and that’s what the 90% requirements are based off of.

So in reality, REITs don’t actually distribute 90% of their profits, they distribute 90% of their taxable profits. That’s after depreciation is taken out all that so they’re not actually having to kick out 90% of their income and net income.

It is an artificially low number. It does not include distributions as you ask, but it doesn’t give an accurate picture of how much a REIT is actually earning.

Robert Leonard  9:27

So it’s almost like EBITDA, but taking out depreciation essentially is where that number is. What are other specific metrics that are most important when analyzing a REIT and can you just look at an FFL multiple to determine if a company is undervalued or how might you want to go about that?

Matthew Frankel  9:43

Well, FFL multiples are really just like price to earnings are really best for comparing companies in the same you know, sub sector for example, comparing retail REITs with one another, or office REITs with one another.

Another metric that you should look at is debt to EBITDA. Debt levels are really crucial in real estate, obviously. In real estate, unlike most other industries, borrowed money is more of a big part of the equation. I don’t know about you, but I’ve never bought a rental property without a mortgage.

So in the real estate world, leverage is a much bigger part of the game. You want to look at the certain debt metrics, the interest coverage ratio is another good one, those are worthy of comparison. You’ll see some REITs that trade at really low price to FFO ratios, but have very high debt levels, for example, that might not be sustainable.

Also, just kind of study the industry dynamics. There’s certain types of properties that are in decline. Retail is what I just mentioned. Brick and mortar retail is really not doing well lately. So you’re going to see some really low valuations there.

But if you’re a veteran stock investor, you’re probably familiar with the concept of a value trap. Whereas you see something that looks too good to be true, it probably is.

Same thing is true in real estate. So ask yourself if you can identify the growth path for that type of property.

I’ll give you an example of a rapidly growing type of property: warehouse, real estate, e-commerce like Amazon, things like that, they need tons of space for distribution, storing products. So you’re seeing industrial REITs really take off. That’s what I mean by kind of an identifiable path to growth. So start with that, then look at your valuation metrics, once you kind of really figure out what kind of real estate you want to own.

Robert Leonard  11:19

When you’re looking at those debt metrics, is there a specific threshold or level that you’re not comfortable with? Or does it really vary depending on the sector? Retail, like you said, you’re probably not going to allow them to have as much debt and still invest in them because of the issues that they’re having. Whereas someone in the industrial space, maybe they can take on a little bit more debt. Is that kind of how you think about it?

Matthew Frankel  11:38

There’s no set threshold. I like to see debt to EBIT of lower than, say, five to one, that’s usually the cutoff in my mind. But there’s exceptions and you also have to kind of take into account how much a company’s paying for its debt, because of the risk involved with certain types of retail.

For example, companies have to pay 5 to 6%, for interest on their debt. Whereas, an A-rated, industrial REIT might be paying 3% for the same type of debt.

So it’s not just the debt ratio, there’s a few factors to take into account. But that is, you want to see that a company is making enough money to cover its debts, even if its earnings went down a little bit, which is why I mentioned the interest coverage ratio using the two kinds of in combination that to EBITDA and interest coverage kind of work hand in hand to kind of give you the full picture of how much debt a REIT has.

Robert Leonard  12:26

So now before we dive into some of your favorite picks in the REIT space, I want to talk about the different areas of real estate. You’ve already mentioned a couple of the industrial space or even the retail space, but the most common is probably retail, like you said, but in general, do you see opportunities in REITs that have exposure to retail? Are you trying to avoid them altogether?

Matthew Frankel  12:47

Well, there’s several different kinds of retail. Everyone’s town has a shopping mall that nobody goes to anymore. But there are some types of retail that are not really prone to e-commerce disruption. Think retail that you have to go to, like a drugstore, or a gas station, for example, or entertainment based retail that doesn’t sell a product but that sells an experience. So not all types of retail are created equal in that sense.

The really high end malls are actually doing very well. There’s a company called… I don’t want to get into my picks yet, but there’s one called Simon Property Group that is like the highest and most there are. Their tenants are actually reporting higher sales this year than the year before. So that retail is definitely a case by case basis there. There are opportunities there.

However, I wouldn’t just say dive into retail at this point. It’s definitely a case by case scenario.

Robert Leonard  13:37

So in general, what areas of real estate Are you super excited about? Then what areas are you just avoiding at all costs?

Matthew Frankel  13:45

Which areas am I excited about? I tend to be opportunistic. So some of those areas of retail that I said, which have been kind of unfairly beaten down just because of the general stigma associated with retail right now. There’s some great opportunities in office real estate right now.

If anyone really follows the stock market, you might have heard about the WeWork IPO drama. They tried to go public and almost went bankrupt. They had to fire their CEO, but anyway, that kind of sent a ripple effect through the office real estate market, where there’s a lot of really kind of beaten down names in inner city office space that are good opportunities that I’m excited about.

I already mentioned industrial, the e-commerce wave. Right now e-commerce makes up about 13% of all retail sales, not as much as most people think. So there’s still a lot more room for that to expand. There are a few really good areas of real estate. Exciting right now, in my opinion.

Robert Leonard  14:35

So let’s dive into two of your favorite picks in the REIT space right now that you actually own and then one that you don’t currently own, but it’s on your watch list, and you’re looking to buy it in the future. So what is your favorite REIT right now and why do you like that pick?

Matthew Frankel  14:50

I have to say my absolute favorite rate right now is one called Tanger Outlets. This might not be the one that you’re thinking of. I mentioned that I’m an opportunistic investor and over the past few days especially in this kind of Coronavirus, I call it the Coronavirus collapse in the market over the past few days, it’s really been beaten down. It’s one of those types of retail that really still has a bright future. It’s been kind of unfairly beaten down to pay something like an 11% dividend just because the stock has been beaten down so hard.

Outlet shopping isn’t going anywhere. It’s definitely an experiential type of shopping that is the whole like treasure hunt aspect of going to the outlets. It’s a very well run company. It’s still run by its founder. They’ve raised their dividend every year for 27 years since they’ve been in business now. So that’s one that is definitely on the top of my list.

If you had a specific one in mind that you might have thought I was going to say I’m all ears.

Robert Leonard  15:42

No, I didn’t have anything in mind that you would specifically say but I am a bit surprised to say or hear that the Tanger Outlets is one of your favorites because I have a couple of those near where I live. I wouldn’t think of them when I go there. I don’t think of them as necessarily being greatest REIT investments, not because they don’t do anything good, or they do things poorly, it’s just not one of those things that you would think of.

Again, I’m not a REIT investor by any means but I’m surprised to hear that that’s your number one greet pick.

Matthew Frankel  16:11

It’s one of the few REITs that really has a brand name when you think of a lot of the REITs. You’ve probably read my articles. They’re not like household names and years more of a brand name than you would think of a real estate company. So yeah, it might surprise you to think that but it’s definitely one of the retail plays that I think is kind of been misjudged by the market.

Robert Leonard  16:30

How about your second favorite REIT that you currently own?

Matthew Frankel  16:35

What do I currently own? American Campus Communities. If you aren’t familiar with that company, they are a student housing REIT. They’re the only student housing REIT in the market right now/ There were a couple but the other one got acquired. Student housing is a massive opportunity. I don’t know when you went to college if you lived in the dorms, but most dorms in public universities in America are not where people want to live anymore. So there’s a massive opportunity for off campus housing developments that are specifically geared towards students. This is kind of a new phenomenon in the past 15 years or so.

American Campus was actually the pioneer of this industry, another company where the founders still run it, if you kind of see a trend developing there. I love companies where the founders are still engaged in whether we’re talking about REITs, or regular stocks or anything. That’s one that I really think has a big bright future.

College housing is a market that’s really not going anywhere. They have a dominant market share right now.

Robert Leonard  17:28

When they own properties, are they partnering with the colleges? Or are they operating completely independently and just buying just say, a multifamily apartment building across the street from a college and then renting that out to college students?

Matthew Frankel  17:40

Well, both of them actually have three separate businesses. I guess you would say they have an off campus business where they’re just kind of building a property off campus that’s geared towards students, but not affiliated with the college.

There’s on campus housing, where the university will actually contract them to build a property that they’ll manage and the university still owns and they’ll manage.

Then there’s kind of just like third party management of other properties. For example, if you’ve heard of the Disney summer program, where the summer internships offered by Disney World are some of the biggest in the country, they just built the student housing for them under contract with Disney. So they’re kind of thinking outside the box with some opportunities like that. It’s just a really interesting all around business.

I think it’s still in its early stages. Colleges are figuring out they don’t really want to be landlords anymore. I don’t think that we’ve seen the last of that.

Robert Leonard  18:25

Yeah, that’s an interesting dynamic that I think a company could probably fill if there’s a lot of people that travel for different internship programs and need housing to set a way to take advantage of student housing, but not necessarily be a part of the colleges in a college town.

Matthew Frankel  18:41

They focus primarily on state universities with huge populations that add really old dorms. I know when I was a freshman at the University of South Carolina, the dorms were actually the same building as other lifts… When he was in college, there’s a big opportunity to kind of modernize the student housing experience. They’re still in the early stages in a lot of their key markets.  I’m really excited to see where that goes over the next 10 to 20 years.

Robert Leonard  19:04

How are these two companies coming onto your radar? How did you even find them in the first place?

Matthew Frankel  19:09

I love businesses that are kind of leaders in their field. There are only two real outlet brand names, I guess you’d say. One is owned by Simon Property, that massive small real estate company I mentioned. I love big brand names. I love leaders in their field. I love businesses led by their founder. I already mentioned that they have a great track record of raising their dividend. That’s a great thing to look for in a REIT or any other stock for that matter.

Both of those have maintained great occupancy rates over time. They’ve added the management has exhibited very shareholder friendly behavior when it comes to, you know, recycling assets, putting shareholders needs first. Both founders have a lot of skin in the game themselves. So as investors benefit they stand to benefit a lot.

But the real answer is that there are about 200 REITs on my radar that I call my investable universe in terms of size and scope and things like that. I have my favorites out of those that night kind of whittled down a list right now I think there’s about 20 to 25 names on it. Those are two of the best values on that list that I have.

Robert Leonard  20:11

A lot of those things that you just mentioned and that you can’t necessarily find in a stock screener. But are you starting with a stock screener to kind of narrow it down to certain companies based on certain metrics, and then you’ll dive in and look at those specific qualitative things that you’re looking for?

Matthew Frankel  20:25

Yeah, it’s a head start with a stock screener. I tend to focus on mid sized companies. It’s definitely something I screened for. Most of the REITs I own are not massive mega cap companies. They’re the middle of the pack, I guess you’d say, like a lot of room for growth opportunities.

With a company like Simon that I mentioned, which is I think it’s the biggest non-telecommunications REIT in the world, the market cap is something around $50 billion. They don’t have a ton of room to grow that as some of the other companies I mentioned. So I started with a stock screener. But I read a lot of company annual reports and you can find the most important parts of an annual report and probably like a five page section in the front. So you don’t have to read the whole 100 page document.

Read earnings reports. There’s an interview with the CEO or founder that I read a lot. That’s kind of the biggest thing. People are surprised that I spend about half my day reading. You’re right that a lot of my investing strategy is more qualitative things that don’t show up in stock screeners.

A lot of The Motley Fool’s and a lot of my colleagues have a similar approach. I think that’s one of the big things that really differentiates us.

Robert Leonard  21:28

Well, I think you’re in good company with all of the reading. I think Buffett and Munger and some other very successful investors said they spend upwards of 90% of their day reading. So I think I don’t read quite as much as Buffett does.

I heard once that he reads almost 500 pages a day or something like a 12 hour workday, and he spends maybe one hour of it doing something other than reading. Yeah, that’s mind boggling to me. But so you’re definitely in good company there.

I think your point about the subjective or qualitative features of a company is a great one, because that’s where you can find a lot of undervalued picks, right?

When I first started investing, and I was a value investor, I thought I could find undervalued stocks based solely on fundamentals, or just solely based on quantitative data. I thought that if I found a company with certain X, Y and Z metrics, then it was undervalued and that was going to be a good pick.

But I quickly realized that that was not the case and that there were a lot of qualitative things that went into stock picks, and that could make them undervalued. I think that point that you made was very good.

Matthew Frankel  22:28

It’s important to emphasize that the numbers have to work, you should start with the numbers first, like you said, either a stock screener or just kind of crunch some numbers. See which companies look undervalued, see what has a good track record of dividend increases, which you could also find in a stock screener, but then if you narrow it down to five or six companies want to pick the best one, or want to verify that it’s actually a good deal and not a trap.

That’s where you kind of need to, like I said, read annual reports, listen to conference calls is a good thing to do earnings reports and articles like mine, I guess if you want the Cliff’s Notes version. I like to be able to break an annual report down into a 600 word article because not everybody likes reading company reports as much as I do. I understand that that’s weird on my behalf.

Robert Leonard  23:09

I think we have that weird characteristic in common because back in college. I was a finance major, but for whatever reason, I had to take biology, chemistry, all these science courses. I remember my freshman year of biology, I spent almost all of the printing dollars that they would give you to print throughout the school year, I spent all of them on annual reports. I’d print them all out because I like reading that better than the electronic version.

The reason I had to spend so much on it was because my biology teacher would continue to throw them away because I wouldn’t pay attention in class because I was reading the annual reports. I think you and I definitely have that weird characteristic in common.

Matthew Frankel  23:46

It served me well over the years.

Robert Leonard  23:48

So far, knock on wood, it has served me well as well. Now let’s talk about your watchlist pick. What’s a REIT that you like right now, but you don’t own it yet, and you plan to in the future?

Matthew Frankel  23:59

I can tell you a few that I love other than valuation. Those are my kind of watch list stocks. I have a list of companies that I would love to own but they’re just not cheap enough yet.

I guess I would say what I mentioned, the industrial REITs with the warehouses, things like that. Prologis is one of the few industry leaders that I really love. Ticker symbol is PLD. That’s one that’s high on my watch list right now. It’s just had a phenomenal run and it just looks a little too overdone to me for the moment from a valuation standpoint right now.

I mentioned telecommunications REITs. There’s a lot of REITs that just kind of own. If you see the cell phone towers scattered around your neighborhood, a lot of REITs own that infrastructure and with the 5g rollout happening over the next couple of years, there’s a lot of opportunity there.

The American Tower is the biggest one in space. There’s a few others but that’s in my opinion, the one worth owning, but it’s like I said it’s had a phenomenal run over the past few years and just a little too overheated in my book. So those are two names but they are just a little too expensive for me to pull the trigger on right now.

Robert Leonard  25:04

And so, when you say they’re too expensive for someone that’s new to the real estate space or the REIT space, I know you mentioned FFO, but what type of analysis quantitatively are you doing to determine that those stocks or those REITs are overvalued or not overvalued, but not to a point where you’re willing to invest in them yet?

Matthew Frankel  25:22

It’s not just the current FFO valuation. It’s kind of have they gone too far too fast out, don’t quote me on the exact numbers. But let’s say a company goes from a price to FFO of 15, to a price to FFO of, say, 35 in a year, which is something like when American Tower is done. That is kind of, let’s wait for a pullback… Let’s see where it goes from here.

I am in the minority at The Motley Fool on that kind of thinking, admittedly, I missed out on some great investments doing that I was the guy who *inaudible* on expensive at $200 a share. So I’m not always right. Though I tend to be more of a value seeker than most of my colleagues looking for bargains in a sector and those I don’t think anyone can make the case that those are bargains right now.

They might turn out to be fairly valued, but it’s more of just kind of looking like they’re getting overheated than just price to FFO multiple because they are trading in line with the rest of the companies in their sector. There are a lot of growth catalysts in the years ahead. But I don’t know if a price to FFO over 30 or 35 is really justified.

Robert Leonard  26:23

Yeah, I fall in that same camp. I tend to invest a lot on valuation and I’ve noticed a lot of people at The Motley Fool don’t necessarily put a ton of weight on the valuation as much as someone like myself, and it sounds like you. I’ve missed out on some picks I invested in TelaDoc and I sold earlier this summer, around the 60s and early 70s range, and today it’s over 120 and it’s going up 230. Tomorrow pre market, it’s up big. So definitely valuation can cause you to miss out on some good picks that otherwise would work out.

So what’s a common piece of investing advice that you often hear given that you think is misleading or maybe just not true? Also, how would you give that good advice?

Matthew Frankel  27:04

I guess the thing that I see newer investors do too often is selling too early. As in, let me show you one of the stories that I learned when I was a newer investor. People asked me what my best investment was of all time, and they asked me what my worst investment was of all time. I told them it was the same one.

I got into the Tesla IPO at $23 a share. If anyone’s been following Tesla recently, it was in the $800-900 share range. So I got into the Tesla IPO. I want to say it was 2013 around, don’t quote me on the year, but a little bit late. A little while after I got in, Model-S was named Motor Trends Car of the Year, and the stock jumped from 23 to about $65-70 a share. I sold it. I tripled my money and I sold. I thought I made the best move of all time. For the money I’ve left on the table by getting out of Tesla too early, I could have literally bought a Tesla Model-S.

So the lesson I learned is if your reasons for buying still apply, and the stocks have gone up, that’s not a good reason to sell that piece of investment advice that I hear all the time by the experts on TV is that there’s nothing wrong with taking profits. I think that’s terrible investment advice. I say there are good reasons to sell. But just because the stock went up is not one of them and you mentioned TelaDoc, that’s kind of the same situation there.

Robert Leonard  28:20

Why do you think so many people fall victim to that?

Matthew Frankel  28:23

Well, because it’s tempting to take profits. So a lot of people are in the mindset of when things are going up, let’s lock in some gains before they go away. On the other hand, when stocks are going down, people are in the mindset of “Well, let’s sell it out before things get any worse.”

We all know that the goal of investing is to buy low and sell high and that our instincts tell us to do the exact opposite. They tell us, “You made a little bit of money. Get out, be safe.”

The goal should be to own great businesses for the long term goal shouldn’t be just to make a quick profit. But as capitalists that’s what we’re wired to do.

Robert Leonard  28:56

Yeah, it’s funny that you mentioned that specific thing because I tend to struggle with that myself as an investor. I have a pretty big position in MasterCard, it is my biggest position. I’ve also done very well in it and it’s up a lot. I argue with myself every day as to whether or not I should start trimming that position.

I come back to that same analysis that you just said. My only reason is because it’s up so much, not because the business has changed, not because my thesis has changed or anything fundamental about the business has changed. It’s just solely based on the price.

Matthew Frankel  29:28

Yeah, that’s the wrong way to think about stocks and just thinking in terms of price is kind of the one thing I would really encourage newer investors to try to rid themselves of that mentality. If your reasons, and I repeated this, but it’s worth repeating. If your original reasons for buying a stock still apply, there’s no reason to sell.

Robert Leonard  29:45

How do new investors overcome that mental hurdle? I think psychology is probably one of the hardest parts of investing. In theory, we want to buy low and sell high, but psychology tells us to buy high and sell low.

How can a new investor overcome this dynamic?

Matthew Frankel  30:04

Learn from the mistakes of guys like you and me. My situation is going to be the first Tesla years isn’t going to be the first and the only TelaDoc. There are going to be other companies that are in the same boat where they jump up a lot really fast, but are still good businesses. It just kind of shows you how I’ve applied that lesson.

My biggest position right now is a company called Square, which you’re probably familiar with. I bought Square at $9 a share. When it jumped up to about $30 a share, I was really tempted to hit the sell button and get out. I mean, I tripled my money. But I said, “This is still a great company. There’s still a lot of room to grow. Great management. Everything has given me the green light.”

So I held on and now it’s in the pre market, it’s $85 right now, because they just reported their earnings. It’s grown into my largest stock position. So I’d say your winners are winners for a reason. They’re winners because they’re good businesses and it’s really tough to get yourself into that mentality.

Everybody has one that they sold too early. Every experienced investor really has done that at least once. There’s no way to avoid it entirely. But the goal should be to kind of minimize the amount of times you do that.

Robert Leonard  31:07

Yes, I’m actually very familiar with Square myself. It’s my second largest position after MasterCard. So I’m in a similar position to you. I don’t have a cost basis of $9. I wish I did, but it’s lower than what it is today. I kind of battle myself on the same thing there. Similar to other positions like Visa and some of my other larger holdings. But yeah, it’s one of those psychological things that I think is so hard for new investors on top of everything else. That’s hard about investing.

So as we wrap up the show, if you were to summarize everything you’ve learned over the years, what would be the number one piece of advice you’d give to a millennial investor listening to the show today?

Matthew Frankel  31:42

Time is on your side, believe it or not, I’m a millennial. I’m an older millennial by like three months, most people’s definitions. Use time to your advantage. Don’t trade in and out of stocks. Buy for the long term, the long term mentality is really the biggest psychological hurdle that new investors need to overcome.

You see a lot of the stocks that are really popular with millennials right now. Beyond Meats is one of the big examples I give right now, that’s going up 30%, one day down 20% the next day, because people are trading in and out of it like they’re at the casino, without knowing anything about the business. All they see is it’s going up or down, it’s going down and they want to catch it when it’s down so that it’ll go up, without knowing anything about the underlying business.

Think in terms of you’re buying businesses that you would want to own if you had the money when you buy all of TelaDoc, if you had enough money when you buy all of Square, would that be a business you would want to own yourself? Think of investing in terms of that, and your mentality will change quite a bit.

Robert Leonard  32:40

Yeah, I think that’s great advice. I like to think of things that way myself as well. Maybe someday you’ll have enough money if you continue to do it that way that you can buy the whole company.

Matt, thanks so much for your time. Where can the audience go to learn more about you and read your work?

Matthew Frankel  32:57

Millionacres.com is the new real estate side of the Motley Fool. Check us out on our Industry Focus podcast every Monday. In fact, if you go to fool.com you can search for my bio and learn more about me then, including a list of all the stocks I own if you’re interested.

Robert Leonard  33:13

Awesome. I’ll be sure to put a link to all those different resources in the show notes so everybody listening today can check it out. Matt, thanks so much.

Matthew Frankel  33:21

Yeah, thanks so much for having me.

Robert Leonard  33:23

Alright, guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro  33:29

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