How to be an Intelligent Investor | Greg Vanderford | Skillshare

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How to be an Intelligent Investor

teacher avatar Greg Vanderford, Knowledge is Power!

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

16 Lessons (3h 29m)
    • 1. Intelligent Investor Promo

    • 2. Lesson 1 Introduction to Intelligent Investing

    • 3. Lesson 2 Safety Of Principle and an Adequate Return

    • 4. Lesson 3 The Most Intelligent Investing is Most Businesslike

    • 5. Lesson 4 Lower Risk by Never Overpaying

    • 6. Lesson 5 Why Buy and Hold is Best

    • 7. Lesson 6 Introducing Mr Market

    • 8. Lesson 7 What To Do When You Don't Know What You're Doing

    • 9. Lesson 8 Waiting for a Fat Pitch

    • 10. Lesson 9 The Power of a Focused Portfolio

    • 11. Lesson 10 Diversification is NOT the Way to Go

    • 12. Lesson 11 The Psychology of Investing

    • 13. Lesson 12 Must Know Financial Ratios

    • 14. Lesson 13 Understanding the Financial Statements

    • 15. Lesson 14 Evaluating Management

    • 16. Lesson 15 Review of Key Ideas

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About This Class


With every so-called expert contradicting the next, it can seem impossible to know where to start when it comes to looking for places to put your hard earned money.

But investing intelligently doesn't have to be complicated or mysterious.

In How to be an Intelligent Investor you will learn:

1. Basic investing principles that will never be obsolete

2. How to analyze the intrinsic value of an asset

3. How to know how much to pay for an investment

4. Why most people are so bad with money

5. How to virtually guarantee financial independence for yourself

6. How most wealthy people got that way and you can too

7. How to avoid the most common investing mistakes that people makeĀ 

8. How to think about the stock market

9. How to analyze businesses

10. Much more


Meet Your Teacher

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Greg Vanderford

Knowledge is Power!


My courses are designed based on my many years as a teacher and student of education and business. I hold a master's degree in curriculum and instruction and have been designing curricula for over a decade.

The business, language, and chess courses that I have built are a reflection of this experience and dedication to education. My goal is to reach as many people as possible with my courses, which is why I have chosen the internet as my ideal mode of delivery.

The following is a little more about my expertise and background. I was born and raised in Sandpoint, Idaho. I attended the University of Idaho where I earned a bachelor's degree in Business Administration in 2004. After a few years in the work force as an account manager I moved to Vietnam where I lived for over 5 ... See full profile

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1. Intelligent Investor Promo: how many was great banter, for I've been an investor and a teacher of finance for many, many years. And in that experience, one thing that I have come across continuously is people who are really confused about finance and about investing. Just in general, people don't know where to get started. They read all kinds of contradictory information, and it just seems like a really confusing subject. So I want to simplify the whole entire topic of investing for you guys in this course how to be an intelligent investor and break things down to their core parts. For you, investing is not that complicated is one of those things that, in the words of Warren Buffett, the greatest investor of all time. It's simple, but not easy. If you would just do a few things right over time, you can easily become well to do, if not well, be without taking on a lot of resources. Big misconception in order to get rich if you take a lot of risks or we don't take any risks that you're not gonna make enough money to have a meal retired. All that stuff is bogus. Basically, if you just follow some really simple rules and generally understand the best ways to allocate your hard earned money, especially in the stock market. These things are not mysteries. We have known how to do this for many, many decades and for some reason, the financial community and the university's and make it seem like some sort of weird, mysterious topic acts. Really, it's not. But by making it seem complicated and confusing a mysterious, they can sell you products and they could make money off of that. It does not need to be that way. Also, in this course, I'm gonna simplify everything for you guys, especially for those of you who just want a simple, basic approach. Slowly build wealth over time without taking a lot of risk. This course is for you. I'm gonna go through all different concepts of how to allocate capital of very behind it. The practical ways to do it successfully had analyzed businesses, had analyst stocks and everything that you guys need to know. So I hope you guys decide to join the course and it would be good decision. If your goal is to make money in the markets over a long period of time without taking on a lot of risk, see inside 2. Lesson 1 Introduction to Intelligent Investing: hello over the course, How to be an intelligent investor learned how to guarantee safety of principal an adequate return with every investment. Investing is a very confusing topic for most people. Scary because you've been saving money worked really hard for it, and you want to know what to do it and you read articles. You watch the news. There's all these pundits. Everyone seems to be contradicting each other about investing. Where's the best place to put your money You put in real estate, you put it in gold, you put it in the stock market, etcetera, etcetera. So in this course, I am going to simplify this for you. And I think it's very logical to start by following what the greatest investors in the world the greatest investors in history have to say. So I am predicated ing my investment philosophy on the likes of Warren Buffett, his partner, Charlie Munger at their mentor, Benjamin Graham, and others from their sort of intellectual village. As Warren Buffett has put it, there is a reason that they have consistently outperformed the market for decades and decades and decades, and everyone who follows the same approach as them and it's a simple approach. The great thing about true investing when some people call value investing it's actually easier and simpler to do than any other form of investing is just that. It's the opposite, basically, of what is taught in business school, what is espoused by all the so called experts on television, and we're gonna go to the reasons for that. This course, one of the main reasons, is because the stuff of those pundits say it sells, making everything seem mysterious and super complicated. It makes you need them. We need to pay for financial advisors. We need to listen to what they say on the news. We need to go pay for expensive business courses because it wasn't his mystical, super complicated thing that everyone understand. They couldn't justify their feet, they couldn't justify their existence. And the great thing about Warren Buffett Charlie Munger is that basically their whole entire careers, as they've been out before the market and getting super wealthy and then teaching what they do to others, is there constantly saying how simple is it's not easy, because I think discipline thinks patients it takes following through right everything in life is like that. It's simple, but it's not easy. And so, in this course I'm gonna simplify everything. So you guys understand the essence of how to be an intelligent investor and to make really good investment decisions. So most people are confused about investing in finance. In general, investing does not have to be confusing. And this course I will show you how simple it is to invest intelligently and a very little risk. I thought to a lot of people who literally don't believe me when I say something, I got to say investing is always going to be risky. It's always going to be complicated, you know, you need to be expert, do it. Eccentric center. That is not true. None of those things are true, as one of us as investing is risky. You don't know what you're doing. Obviously, if you know what you're doing, it's not risky in the long run. Otherwise, no one like Warren Buffett, could exist Who could become one of the richest men in the world at times the richest man in the world doing this one activity, You know, if it was just luck or from a super complicated it wouldn't be so many people that have gone well, be by investing in the stock market. It can't just be luck, and I'm going to show you guys why that's the case. So the general public misunderstand. First of all, the nature of markets, especially the stock market, people tend to think of it as sort of like a casino. It goes up, it goes down. You got to time the market perfectly in order, lots of his money. And a lot of it is because if you think short term and those notions are definitely true, no one can say if the stock markets in go up or down tomorrow. Not even Warren Buffett, the or old Omaha himself. The goal is not to predict what is going to happen in the market. The goal is to value assets, learn how to value an asset, look at the price of an asset and decide whether or not that's a reasonable price, orbits its overpriced or if it's undervalued and imports. We want to try to find assets that are undervalued, make investments in those assets and then wait for our asset to appreciate. It's a simple as that now, of course, it's not as easy in this sounds. The process of doing that is not that easy. It's pretty simple, but obviously, if they were easy, everyone would be rich. Takes time, text effort. It takes discipline, but if you have those things, then you can learn how to do it. If you're not interested in having to go through the entire process, learning this stuff well, there's a solution for that as well as we're going to get into in the course. Mark it as such is there to serve you, not rule you. People tend to treat the opposite. We look at prices in the market and we think that we have toe be buying and selling all all the time. And that's not true. Um, you know the market gives you quotes every day, sometimes both your highs, and has a quote low right. We have bear markets, We have bull markets so called and really we have this huge advantage in that we can wait for a good opportunity. Warren Buffett says, Wait for a fat pitch, use baseball analogies a little. He's talking about investing. You don't have to swing at every pitch you can wait, and the hardest part for most people is waiting in the sidelines during a bull market when prices are going up and then also being afraid and not selling during a bear market market when prices are going down. So very, very large part of being an intelligent investor is actually just having discipline. It's not so much that you have to be super smart. It's mostly that you have to be educated about the way markets work. And then, obviously we live out in this force how to analyze businesses because stocks are just a part ownership in a business, that office, a blip on the screen. And if you can do those things, you will do well over time. You will build wealth consistently over time, and it will not be risky. Case that's of the course is all about. I will teach you guys how to understand the nature of the market so it serves your long term financial goals. Einstein reportedly said that the most powerful force in the universe is compound interest . That's a pretty strong statement from the world's most famous physicist. You start looking at all of these amazing forces and powers in the universe. And he says compound interest is the most powerful force in the universe. Now that's quite a statement, and the reason is that when you have your money com pounding on interest, the interest compounds on itself. You this exponential curve, which in the short term it doesn't look that spectacular. You look at getting 10% of your money in a year, and you okay, I made a few $1000 or whatever. It's not going to make you rich overnight. But once the figures start to get bigger, once they start to compound on itself, you reach something that we call a tipping point. Or others have said an escape velocity think of as a rocket. It takes tremendous energy to get up off the ground, but then once gets up into orbit around the Earth. That effortlessly orbits, too, the globe excusing. And that's the same thing with investing. Eventually, your investments started compound so rapidly that you know, once you have a $1,000,000.2 million dollars, you have to do nothing to just get richer. And that's what we want to learn, of course, how to do even modest rates of compound interest over time will make you financially independent when we say modest rates of compound interest. We're thinking of rates like 67% rates that you can certainly get. If you invest conservatively over time, probably you could do a little better than that. Average of the overall stock market over long periods of time is about 9%. So if you look like a whole century of the stock market, including all the world wars and depressions, everything that happened, you will average about 9% now. There have been certain periods of time short periods, like during the eighties and nineties, where the average was around 13%. So you just invested in the market indexes. There are periods of time 2030 year periods where you would have gotten 12 13% compound interest on your money. Now, the reason most people haven't done that because they're scared of the volatility of the market. The market is volatile, it goes up and down, and so you're watching the prices every day. That could be very stressful, which is like one of the solutions. To be an intelligent investor is to buy high quality assets and then hold them for long periods of time. Don't check the prices every day. We're gonna get into more details about that. How to do that in the course, Of course. So in this course I will teach you how to achieve safety of principal and an adequate return. That is all investor is looking for. We're not looking to get rich overnight. Getting rich overnight is a pipe tree. I mean, we see people with a lot of receive people, invest early days of Bitcoin and get rich. We see people that bought Microsoft for Amazon in the nineties and got rich that very, very rare situation. We shouldn't be thinking about those situations. We want a high probability of success. We want to behave in such a way that are long term financial independence is virtually guaranteed, and it can. This is not something that is even that complicated at all. It's just that there's so much misinformation out there, and most people just not have financial literacy is something that we're not taught in school. And so have you ever do that at all? You learn it as an adult by reading books. Maybe you're lucky to have, uh, an expert and financing your family, someone to explain it to you and kind of de mystify everything. You. But that's what I'm trying to do in this course. I'm trying to make it simple and get everything that you need to know into a simplified version. It's easy understanding, easy to act upon. So following this basic common sense conservative approach is the most certain path so well , and it's virtually guaranteed pat toe well. But of course, it does take time. Warren Buffett likes to say that he can't produce a baby in one month by getting nine women pregnant. Some things just take time. That's his colorful way saying that, you know there's no short cuts at all, But if you're willing to go through the process, it works. They will work for you just as a work for him. So we're gonna go more deeply the next lesson into this idea of safety of principal at an adequate return. This is really the key idea who want in our minds when we think about building well, we don't try one of me thinking about how fast can I get rich? How fast can I grew my well, this is a mistake of a lot of people. Make it. Remember that stocks also go down that invest impulsive Look down. Which is why we need to be conservative. We're not just thinking about upside. We need to be thinking about potential downside and how to ride that out for managing expectations. And we're managing our well over a long period of time. That's gonna include bull markets and bear markets include multiple business cycles. So this is the way that we want to look at long term investing, and that's what we're gonna turn to you now. 3. Lesson 2 Safety Of Principle and an Adequate Return: so there's a basic fundamental idea. Safety of principal, an adequate return. The key to investing is conservatism and patients, which is not exactly the focus of modern society, is it? We want things now and what things fast. We want to get rich quick. We see people on TV every day that a really rich and excuse our idea of reality. It is not realistic to expect that you're going to get rich overnight, whether it be flipping houses or investing in Bitcoin or investing in the stock market. While we may all have heard of someone who has gotten rich quickly, it's not going to be the vast majority of us. And in reality, research shows that a lot of people who do get so called who do get lucky and get rich quickly. It ends up ruining their lives because they're not prepared for it. They have become a target for all kinds of scams. They don't know how to manage all this money. They don't understand the nature of taxes and it's all kinds of pitfalls for someone who all of a sudden comes across the vast majority of wealth, and all of us will say last Not going to be. I would never, you know, squandered billions of dollars if I got it. The research shows that nine out of 10 people who get rich really quickly end up ending up worse off. It's harder than it is to believe. That is what research indicates. But whatever the case may be, we're looking at how to be a good investor when you approach investing with the goal of not losing money, as opposed to how much money can make. You said it yourself up for success that this is counterintuitive. We always want to think about what rate of maternal and getting how fast in my making money . But by focusing only on the upside, we forget about the downside. And a big part of intelligent investing is being conservative and defensive. As Warren Buffett's partner, Charlie Munger puts it, most problems are most intelligently solved by inverting. I mean, is looking at the problem backwards. This is an idea that mathematicians used to salt equations. Even in algebra. You oftentimes have to revert, invert and look at the problems backwards, and this is a very good way of thinking about investing, so problem solving by inversion. Here's a few examples Lawrence of you Rich How can we avoid being poor? That sounds so obvious as to almost be stupid. But most people they overspend their income. They don't invest their money. They have bad habits that lead to be import. You simply first do no harm basically and have basic financial habits that are good. You know, Don't overspend on eating out. Don't overspend on your vehicle, you know, live in a modest home. Basically be frugal. Now you're putting yourself in a position where? OK, now I can think about I have some surplus money I get. Start investing it. And so most people don't think about it this way. Just think about happened. I get rich, but we don't think about how can I avoid being poor first? That's the first step, as that's a way of inverting this problem and thinking about how to solve it. I think if you do the basic thing of understanding your income, investing the surplus over time, investing in a way that is conservative and doesn't have a huge reversals which you can do , which we're gonna learn how to do in this course you're guaranteed to build well over time . Now, whether you become a millionaire or multi millionaire, you know how rich you become. There's no way to know right, But we do know is that you can become financially independent by following this process. Warren Buffett has said that it's pretty easy to become well to do slowly, but it's very difficult to get rich quick, and you need to kind of get that in your brain so you don't have high expectations, overly high expectations and get frustrated. You get impatient with the process and you never get there. You know, even within 10 or 15 years, you can become financially independent. It's a pretty short period of time if you really think about it. Most people think about retiring when they're 65 or whatever, but you could theoretically retire much earlier If you learn how to invest conservatively and consistently over time. Part of that is going to be by being more frugal. Another example is in order to be thin. How can we avoid the fat in order to have good relationships? What behavior leads to bad relationships, right? Things like high expectations, The many things of department that you don't demand of yourself basic common sense, but we don't learn to think this way. We learn the additive approach. I want more of this about more of that. But sometimes we need to invert the problem and look backwards. This is especially true when it comes to investing, because if you don't lose money when you invest, you don't need to get 15 and 20% returns on your money. One of the reasons that Warren Buffett's company, Berkshire Hathaway, has outperformed the market by such high and margins over a long period of time. And it's hard to see during bold markets. And he actually gets criticized a lot because his company actually tends to either underperform or perform about the same rate as the market during bull markets. Is people saying all of Warren Buffett's lost his touch? But what they don't see is that during the bear market, when the markets are going down, that he has so much liquidity is too strong, financial position and his assets, his companies, I such high quality and he outperforms the market by huge margins during bear markets. That means his capital states protected. This is defensive and then when the bull market starts again, is at a much higher base that is compounding. And so over time he outperformed the market by a huge amount of most of the time out. Performance happens during downturns, so it's hard to see it. And so this is sort of the philosophy that we're looking at here is being conservative, being defensive so that you never really lose money and then a modest amount of compounding . Over time, we'll build well, the high probability. Okay, so the first rule of investing is never lose money. And the second rule is never forget Rule number one. That was Benjamin Graham. That's the father of value investing Warren Buffett's mentor. They used to teach at Columbia. He averaged about 13% compound return over his career, which is extraordinary XYZ the bulk of his career. It was during the Great Depression. So during the Great Depression, when he was active and even after he lost a lot of his money in the great crash in 1929 he still put up these huge numbers 13% compounded over long time will make you very rich, even if you're only investing a few $100 per month. And so Benjamin Graham is the one that Top weren't buff it out to the best warmed up, and it actually already read literally hundreds of finance books by the time he even got to college. And so you gotta really early start. He had saved a lot of money. He got a degree in business. He studied economics. Then you would work for Benjamin Graham as investment firm will also studying under him at Columbia. So a lot of this philosophy comes from Benjamin Graham and then Warren Buffett. Charlie Munger is sort of perfected it. They learn from the master, and they took it a step further. And they got about double his long term results and a lot of others that's studied under Benjamin Graham, that went on to become hedge fund managers and run their own funds. They also have on the mark market by huge numbers. So this is my world. But because it's the intellectual village of Graham and Dodd's Bill Dodd was another professor and investor who was Benjamin Graham's partner is not as well known, but he was another person that pioneered these ideas back in the twenties. Thirties. Hello, Benjamin Graham. It's interesting because these ideas are very old, and if anything, they're more applicable now than ever in this dynamic marketplace that we have today, where the swings air higher and faster, and we have way more information available to us that they did back then. We can trade what quickly, more easily than back then. But these ideas have not caught on, and it's very, very interesting. A lot of it goes to human psychology, but a lot of it goes to how pour the information is that is being taught, actually in business school, in universities as hard. That is for a lot of people to believe things like the efficient market hypothesis are actually doing more harm than good and Warren Buffett in China lawyer constantly talking about that. But most people focus on achieving the highest rate of return, and then they end up taking huge risks. If you lose 20 or 30% on your investments and then you have to let that money compound back , it might take you years before you get that. Even so, this very basic ideas, really important understand being conservative and protecting your money and looking at buying stocks that air training at lower prices or buying stocks of really high quality companies that are unlikely to lose value. Even if you don't think you're gonna get 15 or 20% on your money over, you might. You're happy with an adequate return and a very low likelihood of losing money. If you have this approach to investing, you're going to do well and the way that Munger puts it, he says, being conservative and not expecting miracles is the way to go. So this is the mindset that we need to have when it comes to investing. And the kind of paradoxical thing about this mindset is that even though it seems really conservative, we're talking about like being satisfied with an adequate return of only 6% of 7% which might sound kind of low for those of us that might want to become wealthy. The thing is, when you invest this way, you will probably end up with much better results than that we're happy with adequate results were happy with these conservative result. When you invest this way, research has shown, history has shown that you tend to get much better results because these strong assets before very well, okay, so that's the mindset. You wanna have a really important thing. And when you got to wrap their brains around that and next, we're gonna look at, um this idea that the most intelligent investing is the most business. Like you don't just go out there and read an article about some company and say, OK, yeah, I agree with that. I'm gonna go put about for money into that stock. That is not the way to go about investing. You need to research a company that you're thinking about investing in very, very deeply. And if you don't understand that market, that industry industry or what that company does, then we'll Warren Buffett and Charlie Munger do they say they put it in the too hard pile and just move on. You don't need a swing at every pitch. You can afford to be patient and wait for a fat pitch. As they say, That's what we're gonna turn to next 4. Lesson 3 The Most Intelligent Investing is Most Businesslike: so we don't make an investment unless we understand the asset that you're analyzing. Now this course we're primarily talking about analyzing businesses, which means analyzing stops stops are just a partial ownership in a business. Now this applies to other assets, especially real estate. Real estate Is that cash producing asset? If you have an apartment building that you read out and you have tenants and they pay you rent, that is a cash producing assets. So it definitely applies to real estate, and to a lesser extent, it applies to other assets like gold. A problem with assets like gold and other commodities, as we're going to touch on later in this course, is that I don't produce cash so things like gold or looked at as being a store of value. It's a hedge against the other markets. Falling gold tends to you. Common of philosophy is going up when other assets go down. But Warren Buffett, Charlie Munger, they never Baikal When Warren Buffett says that he'll accept Gold as a gift, but he would never buy it. The reason being that you look at the record, the historical record gold has appreciated at only like two or 3% over a long period of time. It's not a very good asset. If you want to build wealth over a long period of time that doesn't produce cash flow. You want to invest in businesses that produce cash that can be reinvested in Mawr Mawr productivity. Excuse me and grow exponentially over time. Gold doesn't do that, so we're gonna talk about that later. A lot of people confused about things like this is one of things that we want to understand . So you want to research the company thoroughly and remember that you don't need to swing at every pitch. People tend own too many stocks. They tend to own companies that they don't really understand. It sort of trust in an Article two did the Rather with What a pundit or two has has said. And this is one of the reasons why Warren Buffet is famously avoided investing in tech stocks. You know, he missed out on this big bull market in the 19 nineties that led to the spectacular crash that dot com bubble bursting right, and he just kept on plugging along and his company didn't experience the effects of the crash hardly at all. And he outperformed the market while it crash. Like I just mentioned in a previous lesson and his much larger asset base just continue to compound and compound. And he got richer and richer while everybody else so lost a lot of money. And the reason is because he stayed inside his circle of competence. Okay, Charlie Munger says most stocks may evaluate. It is going too hard. Pile these guys air brilliant men. They are highly intelligent, but one of the things they've recognizes that they can't know everything about everything. And obviously neither can we. So most the companies that we look at if we don't have some sort of special insight or deep understanding of what it is that company does just simply move on to another one. You don't need that many good investments to build wealth, become financially independent, as we're gonna learn later. In this course, we're gonna be talking about focus investing and how having a portfolio of a smaller number of stocks is actually the way to go. If you want to outperform the market and bill, well, um, steadily and so that's an important idea. It only takes a few intelligent investments to reach financial independence don't need to own 50 stocks. This simplifies the process. It makes things much more manageable, and it makes things much easier and the emotional aspect of it. It is really important to talk about that more as well. If you don't understand an industry, don't invest in it. Already mentioned why Warren Buffet famously avoided tech stocks. You didn't know your circle of competence and stay within that circle. It may be that you only understand one type of business may be you really understand retail . Maybe you have your own retail business. And so it's easy for you to analyze companies that have brands that sell products a sell, physical products. You can easily look at the financial statements, understand? You know the accounting is going on there. The cost of goods sold the margins inventory that growth. If you understand that business, then you should invest in those types of business because you're gonna be able to see whether or not a company is undervalued or overvalued. If you're looking at a really complicated technology business that sells all kinds of different like chips and different components for computers that you don't understand that stuff. Why would you invest in that business despite the fact that it may be growing really fast? And a bunch of analysts might be saying, No invested this documents and the stock is going up. It's going up if you don't understand it, you're not investing like intelligent business person. And thats why is link between investing and being a businessman is key or loving? And Charlie Munger talk about how they're bettered investors because they're businessmen and their better businessman because their investors two things were linked. You can't be thinking about stocks of just being blips on a screen, hoping they go up. Maybe they go down. You gotta be thinking of the actual results of the underlying business. So we're business analysts were not even security. Analysts of stock analysts were business analysts. Another fundamental idea and successful investing is more about temperament and discipline than intelligent. It's not about how smart you are. There's this whole saying that is strong swimmers who drown when you are trying to solve really physical problems. It may be the problem is too difficult for you. A lot of really, really high acu individuals are very bad at investing. This is very interesting. At first, it might seem kind of confusing. It seems like a course. The more intelligent you are, the better that you would be able to understand the stock market and make good decisions. But as Charlie Munger has said, it's better to have an I Q of 130 think it's 1 20 have an I Q. Of 150. You think it's 1 60 It's a strong swimmers who drown. But Charlie Munger and Warren Buffett decided to you and Benjamin Graham as well before them, is to identify easy decisions, not look at really complicated business problems and try to solve them. If you can't predict in the future what's going to happen for a company that investing in it is extremely risky. On the other hand, when you can look at a business and easily see it, it's likely to be selling more of its product in the future than now. It's likely to be worth a lot more in the future than now. It doesn't take a rocket scientist to see that that's a good investment, and one of the examples that Warren Buffett is always using Teoh show this principle is his investment in Coca Cola. Coca Cola is one of the oldest companies there is. It was started in 18 86 their products. One of the most simple pellets that can be. It's carbonated sugar water, basically. But because of their worldwide distribution system because of the simplicity of the product , because it's something that is universal, anybody can drink it and imports. Now there are some concerns about its high sugar content, but Coca Cola owns a whole bunch of other beverage brands. It's very simple to analyze that business. You can look at how much of selling look at their margins. You can look at their growth and look at their reach. It's very, very stable. So when you invested in business like that, as long as you don't pay too much, as long as you don't over pay. And I were going to analyze when Buffett bought a $1,000,000,000 of Coke stock in the 19 eighties. We're gonna look at a few specific examples later in the course about their thinking. When they made some of these investments, you can see that what they're doing is they're trying to identify simple, easy business is to understand and then make a really big investment one to identify themselves. Opportunities don't come that often. It makes sense to make a big bet, as they say, what an opportunity does come. Another way, they put it, is that investing is a discovery based process. You're not the wait for opportunities. It's not a predictive base process. We're not trying to predict it's gonna happen future. Which, of course, is what most investors try to do. But predicting the future is a fool's game. It's impossible basic. That's what we learn. This is why most hedge fund managers, professional investors, actually can't outperform the average indexes as hard as that is to believe. And so the process here is looking for simple opportunities to make an adequate return and then invest as much as you can when you see those opportunities hope that all makes sense to you guys. I've thrown a lot of information out there, but this is the sort of like the basic or principle way of thinking about investing that will help you guys. So Warren Buffett researchers and values a company before he even looked at the stock, Price will read the annual reports. He will look at the price to earnings ratio. He will look at the return on equity. He will look to see how much he estimates that company will we learn in profits for the next 10 or 20 years, and then he will discount that back to the presence is called Has got the discounted future cash form. All this is the way that you're actually supposed to value stocks. I mean, can you guess? And examples of how to do this later? It's not that complicated. It's really just based on your assumptions of how likely the earnings of the company are to continue to grow. And that's why you need to look in businesses that are easy to understand. And they're stable so you can look at the earnings record and see OK. It is very likely to. Coca Cola is going Teoh maybe slowly, but almost certainly continue to grow their volumes and their profits over time. An easy business to evaluate. If you look at a business like a Tesla, for example, the famous tech company run by Eagle must is really unpredictable you don't know how many cars are they going to be able to sell in the future? Now that the stock trades of huge valuation, it may be that they will be successful. It may be at those investors who are actually speculators, not investors, because, as we learn later is a big difference between an intelligent investor and a speculator, which is much more risky, and maybe they'll succeed. But there's no way to know I'm not willing to risk my hard earned money of something that I can't predict with any certainty at all. So that's why the whole mentality here is one of being conservative. So what warmed up it does is he researches and puts a value on a business before even looked at the stock price. And then he goes, looks the stock price. And then if the stock price seems like it's much lower than his estimate of the company's intrinsic value and will make an investment and the stock price looks like it's higher than what he thinks the company is worth based on his evaluation. Then he puts in the too hard pile and he moves on. This is all he does he reads annual reports and he values businesses. And then he compared his valuations to stock market and get it. This is sound like something's too complicated for you or process that you don't find to be interesting or stimulating. Then there's a solution for you that we're gonna talk about later. Very simple solution. So the main source material when researching company of the company's own annual reports. The annual reports are produced, as it says annually every year. It includes financial statements like the income statement statement of cash flows in the balance sheet, which basically tells you everything you need to know about the finances of the business. And then it also has commentary from the Sea CEO, CFO and other executives in the business On those results in those statements on one of the things that Warren Buffett likes to do is he likes to re old annual reports from that company from the maybe a few years before and then compared what they said in there with the reality Now what was it she and so this way he can tell is the management actually achieving things they're talking about in their reports or not? and how honest is the magic? This is a really important idea. He looks for managements that seem to be really honest, are trying to hide anything. If you find any kind of misleading statements, even one sort of misleading statement and annual or is probably not going to invest in a company because, he says, you know there's rarely one cockroach in the kitchen. If the management is going to mislead you about anything, then it's likely that they're probably going to mislead you about other things as well. So he looks for the integrity of the management is being a very, very important thing so you can find a business that obviously has high integrity management that has an easy business model to understand and that is very profitable and then trades at a reasonable price. That is probably a really good investment, and it doesn't take MAWR analysis than that. That's all we are looking for. It's pretty simple. The hardest part is once you make an investment in that stock is to just wait and let the results of that business play out. Over many years, Warren Buffett says his favorite holding period is forever obviously he doesn't hold all stocks forever. He does sell them. But he means that ideally, you want a business that you can buy and hold it forever. We're gonna talk about why buy and hold. Investing is pretty much the best way to go in a later lesson. But usually he won't hold a stock for less than five years. So you want to be confident enough in your decision that you're gonna hold it through a five year period because it takes time for business to produce results. I'm basing our valuation of the business on profits that it takes time for businesses, sell its products and services and get the profits that are gonna drive the stock price higher. And that's why you know things like statement his joke that you can't produce a baby in one month for getting nine women pregnant is such a useful way to think about things is that you can't just, you know, make this stuff happen. There's no shortcut. You have to wait for the actual business cycle, play itself out. So Warren love it doesn't listen to any research reports by Wall Street analysts. Basically, they all contradict each other you have a so called experts on both sides saying, Buy this stock, sell this stock. And so this is one of the things that makes it really confusing. So one of the best things to do is do learn how to value businesses yourself. And then, um, you know, think about it on your own. Do your own independent research and analysis reading all this stuff. It just adds to confusion. And it really has the confusion of the general investing public, which usually ends up with them losing money or maybe hiring a financial adviser. There's unscrupulous and losing money that way, which we're going to look at later as well. So intelligent investing is most intelligent when it's most business like now, the next thing gonna look at is how to lower your risk by never overpaid or stop there some general rules of thumb that we can follow to make sure that we don't overpays a really important thing. Think about 5. Lesson 4 Lower Risk by Never Overpaying: So Benjamin Graham first taught Warren Buffett, Teoh invest in stocks that are trading below their intrinsic value. He didn't put a lot of emphasis on the quality of the business. Warren Buffett kind of evolved from this, in large part due to the help of his partner, Charlie Munger. Um, how he influences thinking that sometimes it's better to pay a fair price for outstanding company, then to pay a great price for a average company and so one about the kind of involved and and later on, as he kind of became the master of investing, he was still revert to his old style sometimes. But then you would also use the newer way of thinking in investing. For example, when you bought Coca Cola, it wasn't trading at a huge discount, but he saw that it was providing a lot of value and that it was growing and that even though we paid like 15 times earnings fur coat, which is not a low price, you got a lot of value because of the brand and because of all of the things that people had going for. But when he first started out when he learned from Benjamin Graham is to buy cheap stocks because ah year, very uh, very unlikely to lose money if you pay a low enough price for an asset. This is the same mentality that goes into, like flipping houses. You pay a huge discount for a property because it's distress for two needed prepares or the owner really needs the cash, and then you put some more money into it. You fix it up and you sell it at a huge profit. That's kind of the house flipping mall. You buy distressed properties of less than what they're actually worth when the stock market will look to buy companies for less than what they're actually. Or that for various reasons, companies will be trading from time to time at a lower evaluation than they should be. And that is on opportunity for us to buy them. One of the general rules that Benjamin Graham laid out in one of his books security analysis back in the 19 thirties is that whenever you pay more than 20 times earnings for a stock, that that is speculative, you no longer than investor you are now a speculator, so 20 times earnings means it means the price to earnings ratio. So if earnings are ex year paying 20 times x for one share of that stock, basically, it's really used to look up the PV issue of stocks on places like yachting, finance and elsewhere on the Internet. He's not saying that you should never, ever pay more than 20 times earnings because a lot of light quality companies do trade at a higher valuation with double. Right now, companies like Google and Microsoft, especially companies like Netflix and Amazon, trade in the hundreds of peace because they're growing so rapidly and then emphasizing salesgirl and expansion more than profits. So sometimes those of speculations might be very profitable, and they might pay off. A lot of people believe in Amazon and are investing in Amazon. But the whole point of this distinction is to just know that you're paying more than about 20 times earnings for any stock that you are now a speculator and you're not in an investor . It's not conservative any more and humane lose money. In fact, if you get into the habit of paying more than 20 times earnings for stocks than the chances that you're gonna make a mistake, and that company is going to have some unfavourable results due to very, very high expectations. In the long run, you're probably going to booze money. So it's just a way of investing that is not conservative, and that is riskier. So what better Graham is saying is that you might make money when you speculate and pay more for a stock, but you're no longer looking for safety of principal and adequate, richer, and you're looking for a big return and you may suffer big losses from this mentality. So in general, you should try to find companies that are trading at evaluation under 20 times earnings and hopefully far under like maybe 10 or 12 times earnings. And you find a company that is really good. Warren Buffett recently made a really, really big investment in Apple, which is one of the first time he ever investigated Tech company. Whether reasons he did it was because he doesn't consider Apple to be a tech company thing . Zamora's consumer products business, because of on the success of the iPhone, the power of the brand and things like that he looks at it is something that he understands and can value more than a lot of the other tech companies. But also, when he was buying, it was only trading it 14 15 times earnings. So we're getting a lot of quality, a lot of cash flow. A lot of profits is getting this famous brand maybe even the most powerful brand on the planet at less than 20 times earliest. That's conservative investment that is a high probability event. It's highly probable that that investment is going to get you at least adequate returns. And in addition, Apple also has a dividend, and they have a big stock buyback program that tends to support the value of shares. Because of the stock is bought back by the company, the number of shares outstanding on the market decrease, and it means that the earnings per share go up. Basically, it pushes the stock price up to put it in simple terms. When a company buys back its stop now, it's not always a good idea for company to buy back stock. That stock is trading at a too high price. They could be using that capital to be doing something mawr value added. But in the case of Apple or any stock is trading at a lower price. It is usually a good idea if the company has excess cash to buy back stock. It's considered a way to return profits to shareholders in addition to the option of paying a dividend. At any rate, we just want to have this nice rule in mine that we don't want to pay more than 20 times earnings for stocking as the company is outstanding and you have reason to believe that you're getting a lot of value. For example, Google is a company that I own. I think it's outstanding company. It's basically has a monopoly on search. It is taking almost all of the advertising dollars, along with Facebook from the whole entire Internet. Facebook and Google are taking the majority of advertising dollars on the Internet. This trend is actually accelerating. It's not slowing down, and both Facebook and Google trade at above 20 times earnings, depending on how you measure. Whether you measure current earnings or forward earnings. Some of the estimate like the next year's forward earnings, their trading both of them between 20 and 30 times earnings. Amazon's trading like 200 times earnings simply with Netflix eso those those stocks I consider to be extremely risky, even though they've been going up for a long time. At some point, they will have to go down. Probably. I don't want to be having to worry about that, but I go ahead and investing companies like Google Facebook, even though they trade at more than 20 times earnings. I'm understanding what I'm doing is slightly speculative, according to Benjamin Graham. But I think I'm getting a lot of value for my money because those stocks, those companies are growing at 2030 40 times 40 Excuse me, 20 or 30 or 40% every single year for the last over years, and they're gonna continue to grow almost a certainty. I think that investing in Google at 20 five times earnings is a pretty safe thing to do, so there will be some exceptions to this rule. You have to use your judgment, but it's always good just to keep this in mind. Warren Buffett originally got rich by buying low priced stocks of actually companies that were very low quality. You learn this trick from Benjamin Graham, the reason that Benjamin Graham focus so much on a strategy because you suffer from the crash in 1929 he lived through the Great Depression, so his investing style was maybe, in today's terms, overly conservative. He looked at the assets of the business, and he simply wanted to buy any business whose stock was trading at lower than the book value off the business, meaning that if it went bankrupt and had any liquidated, it's actual assets like its cash and property. Plant and equipment are valued higher than the total market cap of the stock, which happens, and there's even stocks today that trade less than their book value. And so it's just a very, very conservative way to buy a stock. You're not expecting necessary to make a ton of money on each one of these purchases, but you're expecting to get guaranteed profit because you pretty much can't lose if you buy an asset that you know, according to its book value, is worth more than its trading for. So he called the cigar but stocks because they had only one puff left in them, but it was a free puff. You find this company, it's probably gonna have to shut down. Maybe a few years was not very profitable. Maybe it's not even probable all but because it's trading at such a low valuation. Maybe only three or four times earnings, making some cases five or six times earning but the book value. We looked at this price to earnings, but it's also a ratio called Price. The book where looks at the, uh, the earnings compared Teoh the book value or the access you asked that set of left left over after all, liabilities have subtracted out of the business. And in any case, this is how Warren Buffett got started buying these low quality companies that were really , really cheap. He made a lot of money doing this in the 19 fifties, and by the time he meant Charlie Munger in the 19 sixties, um, the market had gone up in value quite a bit, actually. And so it was harder and harder to use his cigar butt approach. You work for Benjamin Graham thirties because there's so many low valuations. As a stock market went up, it was harder to dio and then buff. It's sort of shifted gears towards this idea of buying higher quality companies at higher prices. If the company's a higher quality, that means it's going to be growing and his earnings. We're gonna be going up for a long time. And even if you pay a somewhat of a premium price, like when he paid 15 times earning for Coca Cola for buffet, that was a high price to pay for a stock. He wasn't used to pay that kind of money for a stock, but tripled in just a few years because of the value he was getting for what he pay was so great. And so that's what it's all about, whether you pay low amount from low quality company or you pay someone higher amount for really high quality company. The idea here and the reason that this is called value investing. If you try to get mawr value than what you're paying for, it's a simple is that and you always have that in mind. When you're buying any asset, whether it be real estate or stocks and you're going to do well over time, it's pretty much a certainty. So you want to buy a business or any asset for less than its intrinsic value. I mean it's actual value, and this intrinsic values actual value of an asset. It can be calculated by estimating the assets future earnings. So if you look at like a new apartment building, you can look at the rents how much profit that you can get from the rents if it's occupied . And you can basically just calculate how much profit that's going to produce each year, and that gives you the intrinsic value of that asset. It's pretty simple. This is why assets like gold or Bitcoin or other commodities are speculative because they don't produce cash. It's hard to value something. It's hard to get an actual intrinsic value, something if it doesn't produce cash. How much is gold worth? It's based on the markets based on what people are willing to pay. So gold goes up when there's uncertainty goes down when other assets are doing well and people have faith in gold because it is tangible physical thing. But it doesn't produce any cash. So what's it really worth? It's hard to know. It also doesn't really have any utility. I mean, gold is using some tech products, and it's also used as jewelry. But other than that it doesn't really have much utility doesn't really do much, whereas the products that have business producers like us take applicant of example of smartphones having great utility in Apple's products, they produce huge profits that could be used to buy that stock to reinvest in new products to really best in future growth. And that growth will drive the stock higher as long as sales go up as long as profits are robust, even if profits don't go up, even if they just stay the same for a long period of time. The stock will go up in value due to inflation due to the fact that they will be behaving prices over time. And the profits can be reinvested either in buying back stock and giving it out of the dividend to the shareholders or in using the profits to buy other businesses by other assets, which is basically all Warren Buffett has ever done. His whole business model is simply to allocate capital, so it takes profits from his businesses and then he goes and finds other businesses that are trading at a good valuation or that are offering a really good value, and then he buys more businesses, so he's constantly just growing Berkshire Hathaway, his company, by reinvesting cash. It's spun off by all of his businesses and especially his insurance operations. But the whole point I'm trying to make it here is that when you buy an asset for less than its intrinsic value, you're guaranteed to make money as long as you hold that asset until the value is realised . The stock market might undervalue in business for a certain period of time, but over the long run, it will efficiently and correctly value that business. This is what we know from having over a century of data about the stock market. And so you lower your risk by Onley buying what a company is trading at a lower evaluation . So calculating future cash flows is this called the discounted cash flow model. It was first described in great detail by someone named John for Williams, who wrote his PhD dissertation on this in the 19 thirties. I believe twenties or thirties, and this is the way to think about how to value stop. So what you do is you estimate the future cash flows of a business up to as far into the future as you like. It might be 10 years, maybe 20 years. You basically, you look at how much money the business is making right now, and you have to make some assumptions. You have the estimate suit, certain growth rates and how much money the business will make in that periods. Let's say you take a 10 year period and you think that the business will produce, you know, $100 billion over the course of 10 years. When you use you divide that $10 billion by the current risk free rate. The risk for you Wait. The Warren Buffett uses is the current government bond yield. Because you buy government bonds that are back to the U. S. Government Treasury bonds, then that's basically risk free, right? We know they're not gonna default all those bonds. So right now the yield is around 3% so you divide that $100 billion by 3% and that will give you a snapshot estimate of the actual intrinsic value of the business today. Now, this is an imperfectly system because you're making a lot of assumptions. It's impossible to know exactly how much profit business is going to make in the next 10 or 20 years. However, this is a way to at least get some concrete actual estimate of intrinsic value. So this is one thing that you want to measure, and then you want to look at the stock price and think, Is it trading at a higher or lower evaluation on this? Right now, you look at the total market cap of the company, and then you divide it by the number of shares, and it will give you what the per share price should be. But one time of Charlie Munger was asked about this. He said, This is the way that we think about stock values, but he and one above it. They said they've never actually done the calculations like exactly they just think about it. They kind of do the calculations in their head. They make estimates. One of the things that John Maynard Keynes said that Warren Buffett quotes off, and he says it's better to be approximately right and precisely raw. And one of the criticisms of a lot of the finance professors and schools right now with their fancy, their math, like their theories, like The efficient market hypothesis is that it is really precise mathematical equations and really beautiful, and they use these to teach business students about stock market. But in reality, those things aren't that useful. In fact, they're harmful because the stock market doesn't behave in a way that the math shows. Actually, the stock market is quite inefficient, especially in the short room, which is why there are all these opportunities for people like Warren Buffett and Charlie Munger to buy businesses at less than their intrinsic value. So I hope all of that makes sense. But in a nutshell we're trying to do is figure out one in business is worth to a private owner based on his future cash flows, and then not pay more than that. That's what we're trying to do now. It sounds kind of complicated, but it's really simple. This is why Warren Buffett and Charlie Munger, when they're evaluating businesses, they just sort of skip over most of them because they think that's too hard to evaluate. That's too hard to. I predict that's too hard to estimate, so they just look at businesses that the earnings air really, really consistent. That's why get. Companies like Coca Cola are really easy to evaluate for them because they can look at their very steady cash flows and they can make some pretty accurate assumptions about that . I think really accurate valuation for the business. That's one of the reasons why they historically avoided tech companies, especially in the 19 nineties, when the dot com boom All these companies are brand new. It's impossible to know how much money they're gonna make in the future. They want to have a company that has an earnings history, so they want to buy businesses oftentimes that are older. They made big investments in American Express and Gillette and Coca Cola, now an apple, because those companies are very, very stable. And then when they're trading at low or relatively low valuations and they got good managements and they're doing smart things with their capital in terms of their capital allocation, like right now, apple buying back stock and having a dividend and not buying too many companies, you know, not acquiring lots of really expensive businesses than all those things add up to a high probability of a good investment. So valuing a business is both an art and a science. You can't just look at the financial statements and go, OK, This business is worth as much for sure. I'm gonna buy this price. That's kind of what Ben Graham did. He just looked at getting a company for a cheap enough that none of the rest of the information battered, I think businesses selling and lessons intrinsic value. And you're gonna make some money. But then Warren Buffett, Charlie Munger, they took that same philosophy, but then they took it one step further. He said, OK, we don't want to over pay for a business, but we want a fight. Try to find outstanding business that is trading at less than its intrinsic value. And instead of making us a guarantee small profit, we want to make a huge long term profit because this business is going to compound our money for a really long time. Okay, so I hope all that makes sense. I'm gonna continue to explain this stuff in many different ways of throughout the course, and in the next lesson, we're going to look at it through the prism of buying and holding for long periods and many , many benefits that you get by doing so 6. Lesson 5 Why Buy and Hold is Best: so a lot of it said about the merits of the buying whole strategy. A lot of people say that it's better to buy and sell a lot because then you could take advantage of price swings and volatility. Basically, the verdict is in on this. If you want to virtually guarantee that you be building well over time in a way that is less stressful and is easier to do than basically buying and holding assets for a long period of time is the obvious way to go. It's just easier because of you. Make one drilling a decision and you buy a stock. For example, with Warren Buffett paid a $1,000,000,000 for his Coca Cola shares in 1988 and 89. You think he bought like, two tranches, but he invested about a $1,000,000,000. Now those shares are worth like 16 or $17 billion. He made one decision he made. This big outlay of cash at the time of $1,000,000,000 is like a huge chunk of his portfolio . Back in the eighties, he laid out this huge amount of cash and then it just sat there and compounded and compounded and compounded for decades. There's nothing else to think about. You don't need to reevaluate that investment very much. Might look at it from time to time and maximize the effects of compounding because your money compounds tax free. You're not paying any fees when you trade. And so the money you save on taxes on the money you save on fees is all compounding. And you sleep well at night knowing that your money is safe. Knowing that is compounding slowly but surely over time. In some cases, like with his Coca Cola investment, it wasn't slowly but surely, it was rapidly and surely, and this lowers your stress. I mean, you know, you make one decision and you can stop looking at your prices every day. You don't need to look at stock quotations every day. This is what drives people crazy. When they buy stocks, the vast majority of the investing public. They check their investments every single day, and this is something took me a long time to learn how to not do, and by doing this, you lower your stress, you lower your worries and research bears this out that when you buy and hold you basically you invest in equities and you don't open the veils, how it's been put by somebody, and you don't check them all the time. You went into a much, much better and more active traders were just kind of crazy. Do you think about it is actually easier. You buy and you hold. You don't do anything. It almost seems like it's too easy. It's too good to be true. But the hardest thing about it is being patient and just waiting for your investments to bear fruit and waiting for your companies to, um, you know, have those earnings that we need. So it maximizes tax efficiency. And Warren Buffett is called this an interest free loan from the government by not paying taxes that that unrealized capital gain continues to compound tax free for as long as you leave it in there. And so you let that money compound for 20 years or 30 years. You're saving yourself hundreds of $1000 or millions of dollars to paying and how much money you have working for you in taxes. And then, at the very end, you pay one lump sum in tax on a much, much larger amount and you would have if you sold it and pay taxes every year. And the lower fees have the same type of wealth building effects. And basically, when you need to learn how to do is ignore macro events, both economic macro events and political macro events. So what I mean by this is sometimes there's gonna be warm, so they make the stock market volatile. Stocks will go down. People get scared of the war that I don't happen and they sell their stocks. That who's one. Sometimes there's going to be things that happen, like the Federal Reserve's going to lower interest rates and raise interest rates, or was going to be maybe a craft in the real estate market. Various things will happen like that that will make stocks volatile. But if you just learn how to ignore them and is, let it happen, you know, take advantage of prices, go down and buy more stocks, take advantage. Maybe if prices go way up for some reason, you in the middle of a crazy boom like the 1990 dot com boom. You know, some people that were smart or maybe lucky and sold their tech stocks you know in 1998 or 1999 before the bubble burst. There are some people who got very, very wealthy because they sold out at the right time. But the idea is that when you buy and hold for long periods and just kind of forget about the fluctuations of the market, you're going to end up doing very well. Is this is a very psychological skilled learn. It's a character based thing. It's not about intelligence is like Warren Buffett says. It's more of you with disciplining character than it is. Intelligence and research by both Charles Schwab and Merrill Lynch has shown, and investors that never checked their portfolios. They outperformed all the other investors that were more active by a very substantial margin. And the reason is it's hard not to look at price quotes because of human psychology. Were worried about losing money. You want to check making money and losing money. I want to be constantly checking and now this is a whole area of finance called you Girl Finance that is researching human behavior related to money and stuffing that, you know, understanding This is worth a lot. I have a whole course on this called the Psychology of Human Misjudgment. Behavioral finance, Um, online as well. And the basic premise here is that we create action. But when it comes to investing, doing nothing is the best thing to do. Is this counterintuitive is difficult. You know, once you've made a well researched decision, you put your money in and then you do nothing. This is so hard for us human beings. Do you want to be active wanting doing something? We feel like if we're trading for busy doing something that were being productive. But when it comes to investing, it's not true that productivity comes from researching your investment from researching your business and then knowing that Okay, this is a good businesses. Is the high probability event here. I'm gonna make a big outlay of cash into it, and then you just have to wait. So it's a counterintuitive type of a thing. But once you really learn this lesson, you get deep really ingrained in your mind, and you will be a good investor. It doesn't take great skill and mostly takes great patients. Okay, and following on that, we're gonna look at this idea that Benjamin Graham introduced a long time ago called Mr Market, and he's talking about the behavior of the market and the reason why buying and holding and a lot of these other things we've been talking about in this class, why they work so well. 7. Lesson 6 Introducing Mr Market: So this idea that Mr Market is sort of this personality is a manic depressive. Sometimes it's extremely pessimistic, and the market crashes and prices are way lower than they should be. Even after a crash, like in 2008 when assets were just nose diving, they actually with lower. Then it book values lower than the intrinsic values of stocks, even though the market was terrible, tends to overreact. And there's times like during the dot com boom in the 19 nineties, work values were way out of whack. The market was way overly optimistic of these new Internet companies or the wave of the future, and that they were all. It is gonna be minting money, you know, as are the I can see into the future. And so this idea of Mr Market provides the intelligent investor with a lot of opportunities to make money. We want to buy on the market is low and sell the market aside. This is a very old saying, Buy low, sell high, but it's very, very rare for someone to consistently do, which is actually why the best thing to do is to try to buy low and then just hold for long periods of time. Benjamin Graham has said that in the short term, the market is a voting machine, which is why it's so volatile. Goes up or down based on what people predict is going to happen based on these macro events that I just mentioned. But in a long term, it's a weighing machine. The market is pretty efficient in the long term. It's going to get the valuations approximately right. But they're going to long periods of time, several years where the valuations were out of whack, which is why patients is so important when it comes to investing. You might have five years where your stocks don't do much at all. In your thinking, man. All this money is just sitting there in the stock market, have made any money. But then you have one year where stocks look 40% and the next year they go up 30%. On all of a sudden you got 7% over your money, and if you happens that out over those seven years, maybe you had an 11 or 12% return. That's a very, very adequate return. So the market is volatile. It's gonna have these huge swings, which is the reason why we don't try to guess those swings trying to get in and out of the market. We pay fees and taxes. We end up losing money because, you know, we're scared that we're going to sell the wrong time. It's very confusing, very stressful. It's highly likely that we're going to lose money that way. It's another reason why we want to buy and we want to hold, and eventually the market will get the price is right. But you just have to wait for that to happen due to human misjudgment and how bad and sometimes are predicting the future. Basically, research shows that we can't predict the future. We need to be able to just do nothing and ride out the store. The stock market basically offers to buy and sell our business every single day at a different price. Don't think about that. If you own a private business, someone came by every day with a wildly different quotations. Suhail Buyer viruses for this much hailed by images for this much, that would be kind of annoying, and it was also a stressful because you always second guessing your something. Maybe I should've still been visited him yesterday, and the next day someone comes in the offer. You lowball amount for your business, getting this constant offer to buy our business. That's what the stock market is. You own a share who is issuing an actual piece of that business. But when you think of your house or you think of your private business, no one's coming and quoting navigate. So this is a great thing about the stock market is liquid. You can sell your shares any time, but it's also something that makes it challenging, and it makes people sort of misunderstand what it is. Just imagine if the real estate market was like this, and every day someone came by and offered to buy your house at a different price, you would say, Go away, Leave me alone. You don't want to know exactly what your house is worth. According to the market, every single day you may know that real estate prices are going up in your house's value is going up. You may know that something is realistic. Prices going down in your house's value have been going down. You don't really care because, first of all, living in your house and also you plan on owning it for a long time. And you know that in the long term, real estate is going to appreciate right? Well, the same thought process needs to be applied to the stock market. But it's difficult because we can see the quotations every day. It's another reason why they say, invest in equities and don't open the mail. You need to have this mentality that you're gonna buy it a company and then don't check the price every day. Don't worry that Oh, no, I'm losing money. The stock is down losing one. You've gotta learn not to think about it that way. You've got to use money that you don't need. Toe live, obviously. I mean, if you're counting on this money and you wanted to doubled and get it out, use it for something. You shouldn't be investing stock working because in the short term, anything can happen. In the short term, the stock market is a voting machine. Look go down. But in the long run is going to reflect the actual results of the business that you Oh, okay. So it's important thing. Understand, as one Buffett says usually likes these these baseball analogy. You don't have to swing at every pitch with luxury of waiting for a fat pitch. I mean, basically, this is a big advantage with stock market. It's like the markets throwing pitches you every day and you just let him go by without being struck out. Right. In baseball, you three strikes, you're out. But in stock market, you can wait for 100 pitches to go by 200 pitches to go by and tell. You have what is right in your sweet spot. You wait for a fat pitch, you got your money ready, you understand the business and boom, you hit a home run, and that's what we're trying to do, Charlie Munger says. The way to get riches to have money in the bank and wait for an opportunity. I think it's simple is that obviously it's not easy to do that, but it's a simple thing to do. You have to be patient, you have to wait, and then when you identify a fat pitch, then you take a big swing and we take a big swing in the stock market you can't miss, either You're gonna hit it because all you do is you need to put the money in, and then you're good to go. So I think this baseball analogy is a really, really useful one that you can just wait for the fat pitch, Wait for the big opportunity before you swing, and you don't need very many fat pitches in your investment lifetime. I mean, some people that about Apple in the eighties and nineties are now independently wealthy just because of that one stock. Some people about Microsoft in the nineties there, wolf, because that one stop. Some people have owned Berkshire Hathaway for decades. And now in Berkshire trains like $300,000 for one share. If you're talking about the the A shares and so that's an amazing thing. If you get in on a good business and you hold that stock for a long time, it doesn't take many decisions like that to do the job for you. If you bought Coca Cola in the eighties and you've held that stop up until now, you're rich. Okay, so it just takes time, and we need to learn that some things in life are, you know, they just require patients that you can't force it. And there's a quote by the philosopher Spinoza. He said All things excellent are as rare as they are difficult and, you know, becoming wealthy Stock market is rare and difficult, but it's not complicated. It's actually pretty simple, but it's difficult because most people just aren't patient. And most people don't hold stocks until, um, they're worth more. And so again, hope this God help us is sinking in you guys brains and you can behave in a way that is rational and conservative. Like I'm teaching guys in this class Now we're gonna look at next is for those of you that aren't interested in business analysis, don't know how toe evaluate businesses like I've been talking about this all sounds like a four languished you and you're not even interested in. Well, there's a simple solution for you, and this is what Warren Buffett recommends, and that is to simply invest in a low cost index funds. You're going to get the average of the market, but that average of the market I said 9% over the long long term is actually higher than 90% of investment professionals. That is hard for a lot of people to believe, because it just doesn't seem possible that all these people could make so much money and not even outperform the market averages. That is, in fact, what's happened. Warren Buffett is one a $1 million bet a few years ago with a hedge fund manager who bet him that a average of I think was five hedge funds with outperformed the S and P 500 Warren Buffett one by a huge margin. It wasn't even close the S and P 500 during this most recent bull market after the great recession of 10,009 it outperformed the hedge funds by a huge margin, and that's really it's amazing, but it's also very instructive. So if you want to get like a good 89 10% on your money over long periods of time and do no analysis at all simply by a low priced in next fun and so I'm gonna go over some of those options in the next lesson 8. Lesson 7 What To Do When You Don't Know What You're Doing: so when you simply invested the locus and explode like the Vanguard 5000 or other Vanguard Index products is lots of different ones. Basically, all they are is they take a large group of businesses and they lump them together and you're going to get the average results. So whether it's the S and P 500 or it's a Bangor, 5000 is one called the Wilshire 5000. And there's other E T efs, which are an acronym for exchange traded funds of they. Basically, it's like a mutual fund basically on the problem with actual mutual funds, though when you invest in those products that are usually sold to you by financial advisor is that there are fees associated with them but hurt your results. Also, the historical results that are printed and shown to you in there literature oftentimes are misleading and not actually true. It will take some like the best performing results from the most recent years, and they were kind of Assad the numbers, Which is why, um, John Bogle, who founded a vanguard he's considered a hero by Warren Buffett himself. Because for most people, if you just want to invest in a low cost index fund they're going to up for most professional money managers and a very, very small fees, and it's a very simple way to go. So as hard as it may be to believe, professional investors on average consistently underperformed the market indexes, and by large amounts indexes are simply the average all companies listed all that index. So the three main indexes that most people are familiar with our the S and P 500. That's 500 of the largest companies in the U. S. The Dow Jones Industrial Average, which is just 30 of the largest companies in the U. S. The Dow Jones is the oldest index, but it's now a little bit. I wouldn't say it's useless, but it's only 30 companies. But getting so 30 companies of the largest, most successful companies and the indexes are constantly changing. Some companies are doing welding. It dropped out of the index and then a rising company that's growing well, he added to the index. So the indexes are kind of like a self renewing, which is one of the good things about them that the company that air on them, they're constantly changing so that only the best companies are part of the index. That's a good thing. And in the NASDAQ is the industrial average. So the NASDAQ has mostly tech companies listed on the NASDAQ, so there's some examples of indexes or index funds for those you're not really familiar with this. You know, if your situation is complex, though, like maybe you're hearing retirement and you don't want to risk your money and stock market at all because you know even an index fund that might go down. You know, maybe you want to talk to a financial adviser. The risky thing about using a financial advisor I have been a financial advisor in my career. Right now, I'm a consultant, and so I just charge narrowly great for my advice, because I think there's a lot of conflicts of interest in the way that financial advisors charge fees. They charge commissions for trading of in charge of a fixed percentage fee for the assets they have under management. I think that there is a slippery slope there and it's kind of dangerous. There's a lot of unscrupulous financial advisers that are basically just sales people that are out there, Teoh make money. So if you're going to look to get a financial advisor, which still may be a good idea for you, you might have some complicated tax situations you want. It's a complicated state playing situations. Or you might just might need some advice, you know, and your new ING retirement and don't want to put your money into an index fund or even into Bonds. Then just use a financial advisor that hopefully is recommended to you by someone you trust . Or maybe someone that you know who's used that financial advisor like, for example, my parents have a financial adviser that they use because, like my grandma before she passed away, she used him for a long time. She really trusted him, and he seemed to really know what he was doing and have a lot of integrity. And so they used him. It's it's gone pretty well. A lot of financial advisors are very unscrupulous, and they're gonna they're out there to make money for themselves or basically sales people that it is trying to get his meaning, assets under management as possible. And so you just have to be very careful if you're going to look to use a financial adviser so either useful that comes highly recommended from a friend, or in most cases, you may not even need a financial advisor. For example, if your situation is related to taxes, maybe you just use a c p A certified public accountant. They should be able to resolve your tax needs. Every situation is related to like a state planning. Maybe you worried about your will. Maybe you worried about your state and, like, inheritance and stuff like that for your kids. Maybe you want to set up a trust or something like that. Then you can use an attorney for something like that instead to And so you know, seepage and attorneys are definitely qualified. Financial advisors are gonna be is mean, a huge range. Help qualified. They are. Some of them have a CFP, which is called a certified financial planner. They're the ones that are gonna usually be the post qualified, but it really just depends on who the person is when it comes to a financial advisor, So recommend caution when you seek financial advice. That's why I simply charge a consulting fee. I will give people advice and like in this case, for example, if it's something that I'm not in the best position to help with, I was refer them to a C P. A. Or turning says, That's your best bet of this. But in general, for investment, advice of your goal is to build well or if your goal is Teoh, make things simple that I recommend either by a low cost index on, or I will help people to build their own focus or folio of stocks. We're gonna talk about focusing and portfolio at how that is the best way to build wealth later in the course, the opposite of diversification, which always come to surprise people because the public's been brainwashed really hard about how everyone should be diversified. And that's a good way to lower your risk, because true is a good way to lower your risk. But it's also a good way not to make very much money, but you diversify their getting reversion to the mean or in other words, you're gonna get average results when you buy next. Fine, you're getting average results, and that might be adequate results. But of you are trying Teoh build well and you have more time like a You're in your twenties , thirties or forties. You're not looking to retire very soon. And what you want is, ah, focus, portfolio. So the next couple of lessons we're gonna talk about investing in folks manner and investing in high probability events and putting large amounts of capital into these high probability. 9. Lesson 8 Waiting for a Fat Pitch: another way to think about investing is that you're investing in high probability events. You want to be able to identify events that are easy to tell, will be successful is basically done in the way of saying, Wait for a fat pitch. And the way we want to think about investing is not even thinking about yourself as a stock market analyst or securities analysis. Securities is another word for, ah, investments in stocks and bonds and things like that. The job of the business analysts are investing in a business the market just tracks. Business results now may sometimes be out of whack with business results, which is why we get opportunities. That's so old fat pitch that comes along to investment. Prices are lower than they should be lower than intrinsic value. All stock analysts began. Equity analysts or market analysts are essentially business analysts, and this is a Warren Buffett things of himself. And so, after analyzed businesses, the results and their future prospects, we are looking for a Miss Price bet, a high probability of success, bet Warren Buffett has said You easily trade a guaranteed profit for a much higher potential profit. Another way of saying that is is not actually trying to get the highest possible return on his money he's looking for is to not lose money and having guaranteed adequate return. Having this mentality ends up often times leading to greater returns than you expected, because so conservatives is a very conservative approach. When you're thinking defensively when you're inverting your analysis. As I explained earlier in the course, when you're being conservative, you have something recalls a margin of safety or above it often uses the example of engineers building a bridge. You build a bridge that is going to have, you know, two or three ton trucks going across it. You're gonna make sure that the capacity for that bridge Israel, to carry way more weight than is actually ever going to be on it. That's a margin of safety. You don't want there even be any chance that bridges going to collapse. This is the same concept that we should have anything about investing our money. You look to a business that is training at a really little price relative to its performance and most companies, I will not have these characteristics. Most companies will be fully priced by the stock market, or especially in a bull market, they will be overpriced, which is why patients is such a big factor. It's extensible investing. What we're waiting for is maybe some short term bad results. Or maybe some bad news. The stock market over reacts, or maybe a company that is sort of flying under the radar. And nobody notices how good of results are on how good its future prospects are. Where is waiting to identify situation like that, where the price is low relative to the quality of business and you buy and simply wait So we're investing in high probability events. But once you've identified a high probability event, you should place in large bet, just like in poker or blackjack. The professionals in those games of chance they identify when the odds are in their favor and they make it disproportionately high. Bet because then you have a higher probability they're going to win money. In that case, it is illogical not to make a much, much larger bet. And once you make that money work, it's hard for you as you can. This is why, as we'll see later in the course, I show you some of those specific examples. Warren Buffett. When he sees a really fat pitch, he has been no the place up to 60% of his entire portfolio, one stop when he sees really high probability. That's a huge bet, which obviously goes totally against the gospel in the world of finance that we should be diversifying or over our rips at the scent diversification it protects against ignorance. It well, I guarantee that you will not lose more than market average but is a regression to the meeting will give you guaranteed average results. And the way to get above average results is to wait for a fat pitch and make a really big bet on that. That pitch. We're gonna give you lots of examples on a lot more analysis about diversification versus focused investing and later lessons in the course. So diversification, it's taught and business school. It has become a standard idea preached throughout the financial community, but it is actually the exact opposite of intelligent investing. If your goal is to build well, if your goal is to preserve well, be conservative and to be happy with average results, then simply by index fund. As Warren Buffett says. For most people, we don't analyze the business. We don't want to analyze the business as we learned in the last lesson, then you should buy the next one. But if your goal is to build wealth and get above average returns than the opposite is true , you should be very, very careful and selective and own a small number of high probability events. And so the goal of business analysts is to identify those events. You know what you're doing. It doesn't make sense to diversify which guarantee average results. One moment said that diversification is insurance against not knowing what you were doing. We don't know what you're doing by the next month. If you know and analyze businesses, then you should be focused. Investor and a focus investor or a focus for polio typically only has 5 to 10 stocks. I personally only own five stocks right now. If I see a company come along, is training and a good valuation, I think is a fat pitch then, although up to maybe around 10 or Union 11 or 12 stocks maximum, there's no hard and fast rule when it comes this this is why investing is one big part science. But mostly it's a part I can't say. Never invest in the company over you. 20 price to earnings ratio as we've already looked at that sort of a rule of thumb. But there might be coming. They're so good that you can break it. Or you can say that it's always good to invest in a company that's trading at two or three times earning that that company is horrible and is destined for bankruptcy. Okay, you need to be able to analyze all the different factors and put them together and user your judgment. I mean, investing is really it all comes down to understanding businesses and then having really good judgment and having independent thinking and that stuff that you like to do and you think you're good at. Of course, all of us can get better at this by reading about it, but learning about it, then you should do the analysis yourself and be a focus investor will probably build a lot more well over time by doing so. If you don't have the confidence that you can do that, if you don't enjoy the process of doing that. It's really simple. Instead of hiring a financial adviser and letting them, you know, break fees off you, what you should be doing is buying a simple lo fi index funds and just wait for your money to slowly compound over time, remembering that some years we flat or even down other years will be up. On average. Over the years, the market will return approximately 9%. At least that's what has happened historically. Okay, so by focusing on your investments, you get a lot of benefits from this. If it works, you can more easily follow the companies in which you're invested. Excuse me if you only have five nothing cos you can read all the financial reports every quarter every year and can listen to what the CEOs air saying. You can follow developments in the industry, and you can really keep track of what's going on. Keep track of your investments as Andrew Carnegie in the Great Steel Magnet and uh, previous richest man in the world, said, The best way to your rich is to put all your eggs in one basket and then watch that basket right? That's the exact opposite diversification Of course, he was talking about his own business, owning his own business in his case of steel business. But basically, the more you know about the company's of your investments. Since you are an actual part owner, you don't just own a blip on its being actually have a part ownership, a real part ownership in the business. It doesn't make sense. If you have 30 or 40 companies, never fully, you can't follow them. You can always going on, and it's just too much diversification. You're not ever gonna be able to outperform the market, so we're focusing your investments. You increase the probability of outperforming the market, getting above average results. But you must wait for opportunities and usually bear markets or with stocks trading below their intrinsic value, those of the opportunities were waiting for so value investors and focused investors. We welcome the bear markets because bear markets rivers at lower prices in 2008 and nine when stocks crashed. If you or ah savvy investor, you would recognize that what stocks near all time highs that the risk of a correction would be high and you want to keep a lot of cash or have a lot of your money in bonds prepared for a recession or a bear market where that happened, it's hog heaven bay because prices and all stocks go down by 2030 sometimes even 40%. And then you're getting a huge discount. You're still getting the same companies that whose long term prospects haven't changed because the stock market crashes because of the recession. It doesn't mean that the prospects of Coca Cola or Disney or Apple or any of these really strong cos they're not going to change over 10 or 20 years. They're gonna change in the near term. As people lose their jobs and spending goes down, results will be bad, relatively speaking, in a recession. But it also means that you have an opportunity to buy their stocks at a discount and get a good price. So you must wait for opportunities that give me saying this is a discovery based process. It's not a prediction based process. We can't bring the future. We don't know what's gonna happen. But we know that if you buy stocks of good companies for a low price, no matter what happens in the future, the probability they're going to get a favourable result goes way, way up. So this is much, very much a game of high probability events and thinking in terms of probabilities, you have an advantage over other investors that have been brainwashed to diversify. I mean, everyone has ever going to business school or watch the news as hers were. Diversify, diversify! You gotta think self and birth. It's in everyone's brains. And even a lot of very savvy professional investors use this mantra because diversification it will live in your downside. But it will also living here upside. And if you ever want to truly build wealth in a way that the best invested in the world, uh, do it, then this is the way to do it. Okay? And in the next lesson, we're gonna continue this idea about a focus portfolio, even give you a bunch of examples. Would Warren Buffett Charlie Munger made high probability events and how they paid off hugely 10. Lesson 9 The Power of a Focused Portfolio: So the following their some examples of focus investing during the 2000 stock market crash . Warren Buffett and try a longer. They became extremely active a lot of the time I was in the vast majority of the time. They're actually very inactive once they make these investing decisions where they put their money at work, they sit back and they let compounding. Do its thing is pretty much the exact opposite of what most investors doing what most hedge fund managers are doing because of trying to show people that have invested in the portfolios, that they're active, that they're earning the money and that they're they're trying to beat the market. In the short term, they're always moving money around. Being very active, focused portfolio manager will be the exact opposite. You are very, very careful with your analysis and your judgment, and then once you place your bets, so to speak, you weight. But when the stocks crash and stock market crashes all of a sudden prices of gun down and this is a huge opportunity to put cash, it works. Of course, it means you have you have cash or you have to have some of your money and bonds. You can sell those bonds and buy stocks. So, um, warm, loving Charlie Munger they bought during a panic when most companies were desperate for cash. And they're willing to sell a huge discount to intrinsic values, not only where they're just getting huge discount in the stock market, but they're getting phone calls from all types of banks and insurance companies and other companies from CEOs that were destined for liquidity and desperate for cash. And, of course, their company, Berkshire Hathaway. They always keep billions and billions in cash for just such an occasion because they're, you know, they're the Masters, the master investors, and they teach us what to do with you. Let's observe how they behave and then basically all in their footsteps. I'm gonna have a pool here from bearing the Rothschild, the famous Rothschild banking family. This the Baron was the the first in a long line of bankers, and the way they originally made their money was lending money to governments during wars On what he said was the time to buy is when there was blood in the streets and another way of saying that modern terms is during financial crashes. When there's a lot of chaos and stocks go down in price and everyone else is selling in a panic because they're worried about losing money, the savvy investor would be coming active and be a fire so warm a bit. Bought Burlington Burlington Northern Santa Fe Railroad for pennies on the dollar and got a huge discount. And a railroad has a really good business in modern times because of the huge, huge costs and reproducing one, there's gonna be no new competition in the rebel business in the United States. There's basically on oligopoly. There's like a few companies, and that's it is not gonna be any new ones. It would cost billions upon billions of dollars to build new railroad. There's no reason to do it because the herb railroads can handle the capacity that is needed. But that doesn't mean that you should buy one. It's not trading in a favorable price water during the crash, but but saw that BNSF was trading at a huge discount to where it was previously a really good deal. So he bought the whole entire railroad at a huge discount. Charlie Munger, he invested over $100 million in bank stocks at the bottom of the market, he tripled his money in just a couple of use. He took all this cash we had lying around. And one of his companies in California, Cassie Munger, is a huge investor in Berkshire Hathaway, and he's the vice chairman. He's buffets. Partner Butch are half of it, but he's also the chairman. A bunch of other companies and they both have their own separate money for investing. In this case, a Munger took a bunch of money that was in one of his companies called the Daily Journal, which is a legal publication. Charlie Munger is a lawyer. He hasn't practiced every long time, ever since he became a super rich investor. But he still owned a company called the Daily Journal, which publishes all these legal types of information. And he took the money that was in that company, and a couple other companies once called West go financial cash that was lying around in there, and he just bought all these bank stocks because he recognized once you realized for sure that the banks we're gonna be saved by the government that they were gonna go bankrupt. I think they were trading these banks trading at, like two or three times earnings, which is just absolutely, unbelievably cheap by any standard time. There's no way they're, you know whose money as long as they don't go bankrupt. And even if they go bankrupt, the trading below the book value, as we learned earlier when I talked about Benjamin Graham and his strategy, even in liquidation. And investors want to make a profit because the assets that could be sold off are literally worth more than the market cap in stock market. So this is a very, very safe way to invest. And it's very ironic because most people are terrified of their selling, but is actually when you have the most opportunity, you just need to be able to wait for the assets that you're buying to appreciate. So again we see the value of being patient with this strategy and investing in general is a game of patients. I mean, whether you're talking about gold or or real estate or any investment, you have to wait for the value to go up. It's not gonna happen overnight, and this is why in order to be a really good investor or especially be great investors. You have to have great patience. And really, that's what it's all about. That the famous oilman Paul Getty you at one time was the richest man in the world. Once, when he was asked how he got so rich, she said simply, I buy my straw hats in the fall. We meant by that was that he buys assets when they're at their cheapest. Why would strong hats the cheapest in the ball? Well, summer's over, and not very many people are buying them, so demand is very low during the fall. But he knows that the men will be high the next year around during summer time, and so he simply waits for the value to go up. And that was just an example. It was giving literally five straw hats and resell them up. But that's the whole philosophy that we want to have. As investor. We want a violin presto low. We want to sell when prices are high. It's simple. Is that but the exact opposite of how 90 probably 5% of investors behave because human beings are irrational or emotional are extremely emotional about money. And so that's why this is a character based process where you have to have discipline and patients. It's not a process where you have to be a genius. I'm going to say some of these things over and over again as we've been so brainwashed by the pundits on television and by the financial news and publications to think in these terms of diversification and make these assumptions that are based on false premises. So that's what this is all about. And I hope that when you listen to this course, you think about these things. You really love these ideas sinking because this is not just me talking. I mean practices stuff. In my life, I teach business. I invest. I have my own portfolio. I told you I only a few stocks myself. But this is what I've learned from the greatest investors, literally in history, in the financial markets, a sophisticated financial markets that we have in stock markets. The group will have been around for about 150 years, going back Teoh, England, and development of their on stock market. They called it the force back in the 19th century I mean, of course, has been investing in real estate businesses and companies for a long time. But these markets that we have exponential markets. It's a relatively new development in human history, and these guys have produced the greatest results. They had the best record in history, and their records have lasted in Buffett's case, literally over 70 years, when he bought his first stock with only 11. And now he's like 88 years old. Charlie Wonder is like almost 95 years old. He's been investing since his thirties. So these guys have been the game for a really long time, and they have outperformed pretty much everybody else in the world for literally decades. So they have something to say about investing, and we don't listen that I think that's pretty stupid. Why would you try to figure everything out on your own when you have the Masters just sitting here, giving us the advice and just teaching us everything they know for free? I just think about how much would you pay for a masterclass from, You know, some of the greatest business minds in the world. A lot of people have been a lot of money for that. Well, these guys were sitting here every day and interviews and writing books in their annual reports and at the annual meeting, just telling us their playbook. This is how we make money and stop. This is how we do it and most people ignore them, which is unbelievable. I mean, finally, a lot of people listening. That's why they're famous. That's why I know about them. It's still this is the way that most people actually behave. Then everyone of you really, really rich. Of course we're not, and a lot of it comes down to difficulty and having discipline, having the patience to wait for the results to take place. People simply can't stand waiting, and then they sell too soon or they buy and prices that are too high. That's usually what happens so back toe examples here. What bumping did during the crash was he received very favorable terms all kinds of the preferred stocks, which is just a special kind of stock that is usually held by management's. It means that if the company goes bankrupt, the preferred stockholders they get paid first. Usually preferred stocks have dude in kind of high dividends, but in general, they don't tend to be as good of investments as common stocks When the markets are going up , it's just that they have a more state in our default, basically. But what he did was he So okay, Teoh a company. Next ways he gave him a calling in cash were maybe gonna go bankrupt. And he's okay giving X number of shares and prefers stock for this much money. And he negotiated really favorable dividend. Thinks he's getting six or 7% dividend raise. Who's buying Bird shares for huge discounts on the cheap? A bond of a whole bunch preferred shares and all the germ banks, Bank of America, lots of different base that he never normally would have been able to get, wasn't he was the one that had the cash during this panic. He became very active, make tons of other investments. This is one of the types investments that he made is that it's an example of a high probability event and where you really couldn't lose money and we don't have to be billionaires to do this. I mean, if you're only investing a few $100 a few $1000. It's the exact same process. It's just that the size of our portfolio is going to be different, that's all. What we're trying to do is trying to get better returns and averaged better returns on the market. And this is the playbook that has been handed down to us by the great players of the game. And so all we have to do basically is let's no have it say Learn, had an alliance businesses and then follow in their footsteps. So about three examples here of when Buffett made high probability best investing a huge portion of his portfolio in just one company. And the best example of this is way back in the mid 19 sixties but been invested over 60% of his whole portfolio in American Express when it shares were depressed and what happened was there was like a scandal with American Express. They got a whole bunch of headlines where I can't remember the exact details of it, but they were involved in some company. You guys can look this up on your own on Google, and people thought that the visit was going down. The tubes and their reputation basically it was going to be came to for a long time and the stock so long, like over 50% within one year, so warm. But you know this kind of attention. He looked the business model. We could look to the margins, looked at all the financial statements, and then he thought about the brand. American Express is very strong. Powerful brands of famous brand new of brands take a long time to build up because what a Brandon presents a sort of a piece of a consumers mine, in the words of Buffett and Munger. But you think about American Express or you think about Coca Cola, you have, ah, something in your mind feel. Coca Cola's usually the very top of the list of most powerful, most valuable brands. Another really good one is Disney, Right? When you think of Disney, you think maybe your child. When you think of all the movies that they have made, maybe you think of Disneyland. It has this feeling in your mind. And so Buffett and Munger, they think a lot about brands and brand power, And he recognized, you know, the odds of American Express going back up with the odds of them not doing well in the launch are very low, and all the sudden he's being uppers headed or he's being presented with this opportunity to buy a stock at less than 50% of orchestrating just a few months ago. So most people were afraid, right? They were fearful. He was greedy, greedy when others are fearful and fearful when others are creating. We're basically doing the opposite of what the crowded do it. Just with that, we have to make sure their judgment and our analysis is correct when we act in a contrary and manner and do the opposite of the crowd. So he invested over 60% of this whole entire portfolio Justice One stock, and he tripled his money within one year. So he made a ton of money for himself and his clients because in the 19 sixties she was running a small partnership, started with only $100,000 with his family's, uh, friends money. In this partnership, he was managing it for them that $100,000 is worth about 10 times as much of that, so he started with a little over in in today's terms, a $1,000,000 in assets, and he grew rapidly during his early years. He was making 30 40 50% returns on the partnerships money, which is, I mean, almost hard to believe. But those the real stats that he was putting up without a day in the fifties and sixties when he first got started, he was outperforming the market like 20 and 30 points, which is just totally unheard of when you think of anyone today, is that the investing and nobody is doing that. So in Buffett's day, when he was doing with small amounts of money, he was just crushing it. He was getting rich really, really fast, and no one had heard of him. You just sitting there in Omaha, Nebraska, in his office, just calm, pounding money. You want something, this name work for some big hedge fund or something banking Wall Street? Eventually he got so rich he started buying whole entire company. He started buying like big blocks of stock and famous companies like Washington Post, and people started going. Who's this Warren Buffett guy? And he started showing up is just a big shareholder of these companies, and that's how he started to become well known, and then the rest is history just, uh, sort of compounded his money until he was the richest man in the world. But this American Express bet is an early example of how he behaved, a showing that when you see a high probability event on a opportunity where high quality asset is trading at less than its intrinsic value, you want to bet as much money as you can on that opportunity. The next one. He invested over 30% of Berkshire's top of bullying cola in the late eighties and 89 period . This one is different because Coca Cola had actually been going through a period where it shares a bit, advancing a lot, and he made a huge investment in Coca Cola. At the time, it was about a $1,000,000,000 which in the eighties was 30% of his whole portfolio of a lot of money. Back then, important is now due to inflation, and people were kind of scratching the head of this Going critical is not a cheap stock on the Australian 15 times earnings, which isn't really expensive, but he is looking at the quality of the business. What is going to do in the future and then based on the price now so stock doesn't have to be super cheap, and it also doesn't matter if it's a little bit expensive. The whole point is finding value. This is why this has been called value investing. China get more value than You pick one of them says prices. What you pay values what you get. So the American Express case. He bought a discounted asset after this standard Coca Cola's case. He paid basically full price for a stock that he knew I was going to continue to go up a lot due to really good management. There was a new manager named Rosetta that was doing really smart things with capital. So Warren Buffet. That's when he looks at the management. He saw that the margins were growing. He saw that there volumes were growing and so it isn't matter what's happened in the past. A lot of it will read the charges. They think over stuff kind of a lots, not gonna keep going up. Well, then you look at stocks like Amazon and just keep going, going up, going up, going up decade after decade. Just because something has happened in the past doesn't mean gonna happen in the future. So when you analyze the business you're trying to look at, what can we say is concrete, you know, and the things that are concrete, that air riel, our sales volumes, margins their balance sheet. How much did they have? And then you look at the management of the honest and what are they doing? And so he just like Coca Cola and saw this great business that powerful brand people are not going to stop drinking Coca Cola any time soon. The company's been around since 18 86 have really high margins and the management of doing really smart things. It was reinvesting into its core business. It's high margin business and even now that people have started to drink a lot less sugary beverages and people worried about their health, Coca Cola takes their capital from their main products of their carbonated sugar water basically, and they're buying other beverage companies other beverage drink. So it's not just this one brand now that is bringing in all of the money. The company is still a very strong company, but the thing is Warren Buffet laid out a $1,000,000,000 in the eighties, and now that investment, which he hasn't sold one single share of in 2000 and 18 almost 2019 now is worth almost $17 billion. So he's gotten awful 17 times his money, and he only had to make that one decision, bought it and waited. And that is really what we wanted to. We don't want to be an agonizing over our investments. We want to buy something that's stable. That's a high probability event, and then you let your money compound over time, you don't know if you're going to get 5% return, a 10% return or 20% return. There's no way to know, but we will. We want to do is make sure first, we don't lose money and we're going to basically guarantee ourselves an adequate return. This is a mentality of the intelligent investors. Why I started this course with that, saying of Benjamin Graham's investing, intelligent investing's is when you guarantee safety of principal and an adequate return and these high probability events are away, that you're almost certainly going to get safety of principal adequate return. But in many cases it's gonna end up working out better than I thought and a lot of Warren Buffett Charlie Munger investment. They actually end up working in a way better than they expected or hoped for. Two because they were so conservative in their analysis. And when you invert the problem and you first looked to not lose money, you will start to identify assets that are very low risk. And so basically all you have is upside, and there's almost no chance of downside. This is the way they want to calibrate our brain to work when we're thinking about investing, can. This 37 year is very recent one. Just over the last couple of years, Berkshire has accumulated a huge amount of Berkshire of, ah, excusing Apple company stock. They own over $40 billion of Apple stock, and it is valued at over 20% of their current equity portfolio is made up of just Apple stops. That's 1/5 of their equity portfolio. I say equity portfolio because now books are so big they own like 70 businesses completely , and so that's not stop. That's the whole business that they own. They bought the entire company, but they still have, like, almost $200 billion worth, um, stocks in their equity portfolio and 20% or so of that whole portfolio is made up of this one. Stop, stop. And this is what they like to do to find a high probability event and then by as much as they can, but by a giant block of it and the $43 billion I mean, that is more than 90% of listed companies are work that someone stop. Berkshire has this one company, so they're very, very confident in the fact that Apple has a super strong balance sheet like the management . They like the brand of power. You know, the pricing power it has. They've been raising their prices for their iPhones. The service revenue is growing, and they just see that the odds of apple not continuing to compound at an adequate rate in the future are very, very low along. People worry that will apples not gonna be able to continue to grow the number of iPhones that it sells indefinitely as the smartphone market matures? That's probably true, but the fact is they have billions them over $100 billion in net cash, actually about $150 billion in net cash. They've got a $250 billion in cash. They have a lot of debt because they borrowed a lot of money for various reasons in the last few years when interest rates were low and all other money was overseas. So it made sense them to behave that way. But they've got a huge stock buyback. So since the stock is trading a relative nickel evaluation, they buy that the stock, it drives the price up and they just have this really, really rock solid will say overall situation, combination of balance sheet brand, the profit margins. All of these things may warm up and say, OK, let's buy a lot of this And Charlie Munger said he thinks that they were way too restrained . He wishes that they would bought a lot more Apple stock, which I think is very interesting. Munger is even mawr of a focus investor than Buffett, just kind of hard to believe and look at his 60% allocation to this one stock in the 19 sixties. But Munger has had even more focus portfolio over the course of his investing career, which use investing on his own. In the sixties and seventies. After you met Warren Buffett, he was running his own little hedge fund. They back in the day they called a partnership, and he got 24% compound return over about 12 years, which is outstanding by any measurement. I mean, if you're compounding money at 24% a year for 12 years, you're going to get rich very, very rapidly. And that's what these guys have enabled Dio. Now that doesn't mean that we can match their results, but we don't need to match their results because they're building there's or involvement with, like, $80 billion. I mean, you know, our goals probably are to maybe become a millionaire or maybe make you know, a couple of $1,000,000 or whatever you're personal goals are. I mean, financial independence is Michael, and I'm getting really close already to doing it, and it's from following. This philosophy is really not rocket science. The hardest part is when stocks go down. Teoh, you know, just stick to your guns and either hold them or buy more. That's the hardest part of investing and basically Warren Buffett and Munger. Benjamin Graham, Phil Fisher's Another guy will talk about They make the case. I mean, the greatest invested in history, that this is where you have to be able to do, and it does take guts. I think it's not easy to do this, but these are three really clear examples, and they're different examples of when these guys did that. American Express, Coca Cola Apple An interesting thing about Apple is that Warren Buffett's famous for non investing in tech stocks. So it wasn't why now, why you investing in tech company? And he said, Well, he doesn't see Apple is being a tech stock. So much to consumer products business. The iPhone is a consumer product that people by and therefore it's in a circle of competence. Now he understands the company you can. You can analyze what it's doing, whereas with a lot of other tech companies he doesn't really understand is he says exactly what the company doing. You can't predict what's gonna happen in the future in a lot of these text spaces, but he understands powerful brands, understands consumer products, and you understand the balance sheet understands that management, the capital allocation so Apple to him isn't so much a tech stock. It's more of a consumer product to stop, and that's why he bought it. You know that text up so it shows that he's very flexible and he's not, you know, on an ideologue about sticking to just one very, very specific strategy. I mean, these guys were masters. They know how to identify value. They know when opportunities arise. And we can kind of learn to do the same thing, maybe to a lesser degree. But we can still learn how to do what they have done to be successful at it, because his idea of focus investing is just so important and so different from what is preached on TV and in the hallways of, you know, the business schools around the world. I'm gonna go on a little bit more about this idea. In the next lesson is 11. Lesson 10 Diversification is NOT the Way to Go: So I think I already bought up this quota. Andrew Carnegie, right? The former richest man in the world. Carnegie Steel, he says. Put all your eggs in one basket and then watch that basket. I think about that. I mean, most business people. A private business owner typically has the vast majority of the network in just one business. Just one business. Now you're trained to think in terms diversification. That sounds crazy to have all your money in one. This is one of that business fails, or what if the stock of that company goes way down? But if you think about it in terms of a private business, it's very normal for someone to own one business that they run advantage themselves and f also their money in that well, a publicly listed company is no different than a private business. It's still in business when you own stock in a business, you own an actual part ownership in that business and that you should be thought of the same in the same way. This is a disconnect that a lot of Main Street investors have, and they buy a stock there following the pricing every day and go up 2% today. Oh, it went down 1% today, and it stresses them out and they think about it. And that is the sort of detached away, as if a stock stuff is real thing. But it's a really ownership in a business. So in reality, you know, even owning just one a stock like if you have all of her money in just Berkshire Hathaway, which is Warren Buffett's company, where he has a vast majority, of course, of his private wealth that is state as long as it's the right business. Andrew Carnegie's money was safe in Carnegie Steel. That company was a rock. Why would he put his money and other businesses when he has it all in the best business? So this is something this is a sort of thought exercise for you to think about, how logical this is and how you think about a private business. It totally makes sense to be invested in Onley one business. Or maybe you have a few businesses, but you know a lot about them. You know where the money is. You know, the financial statements are, you know, the prospects for the future you can easily track was going on in your own business. Well, you could do the same thing. When you own public businesses, all the financial statements and data is public. You can read through it, so there's really no difference. All. The only difference is since the stock market is so liquid, because you can buy and sell at any given day when the market is open and it's giving you price quotes every single day and leaves the situation where one is more stressful and more information is flying out you. But to it's also such that prices will usually be higher due to the living that liquidity people will been prices up in the high quality companies. It's not hard to see that coming, like Google or Facebook are really powerful, strong companies, but you don't look edible. What is the price of their stock? That's the whole name of the game, finding a Miss Price that it's easy to identify his good cos it's hard to identify an opportunity where a company is trading at less than its intrinsic value. But the idea that having only a few stocks is inherently risky goes against what the greatest investors in history are telling us, and probably the famous economist in history of the British economist John Maynard Keynes. He may have been the first focus portfolio manager. He ran the portfolio of the Bank of England, and he owned fewer than 10 stocks. And he laid out his reasons for doing so when they were the same reasons that we're learning in this course. And he was this total geniuses economic genius. He wrote all kinds of publications and books about economics. Having Kane's E and economic policy is what governments are following right now, when they are using stimulus, lowering interest rates and printing money basically, for to increase liquidity in an economy cash circulating around. This was basically his solution because he was active during the twenties and thirties and lived through the Great Depression, he said. Well, we could have solved the great depressions problems by pumping cash in the system because will happen in the Great Depression was that nobody had any money to banks and have any money, and there was no quid ego and all of a sudden jobs overnight, you know, millions of people are out of work. There was no one anywhere. Even the rich didn't having in liquidity. And so the whole solution to these giant recessions this is actually was saved the world for another great depression about it would be even worse is harder. That is, to believe in the first Great Depression in 20,009 is that then Bernanke, the Fed chairman of the United States but a Reserve bank. He understood what Keynes said. You know, 70 years ago that we you need when you have these huge recessions is that you need liquidity. You need cash flowing through the system. Things can't just grind to a halt. So he's an extremely influential macro. Economists of that is influencing continue to influence a policy government to this very day, and he also may have been the very first full is portfolio investor. I mean, the find a Bank of England. The time was huge by today's standards in real terms used managing billions and billions of dollars of if you account for inflation, and he only owned a few stops, he said. The same reasons here because you can't follow 2030 40 companies, but you can really follow closely what's happening with a few companies, and it do it focused your portfolio on the best businesses. You're going to have outstanding results. Of course. Young before the market by huge numbers. His results are that he got a 13% compound return over the life of his official investing career, which sounds a lot lower than Charlie Munger. 24% of Warren Buffett's 20% over the course of uh 70 years. And the reason more buffets is only 20%. Because Berkshire has gotten so huge, you're going into the problem of the law of large numbers. It's harder to get those big results. But John Maynard Keynes that 13% during the Great Depression, you got 13% compound intense during the Great Depression. Now that's pretty unbelievable. I mean, how can you do that when markets are tanking? 2030% you know, every year and just staying low for an entire decade. He got 13% compound results on his money with a focus portfolio, so the proof is in the pudding. Here you can study the records of these guys. It doesn't mean that this is an easy thing to do, but they're telling us that it can't be done, the telling us how to do it. And the idea is not that you have to be a genius. It is. You have to understand the basic philosophy and used have to have the grit and the discipline. Teoh Hold on When the seas get rough because they will. Having investing is kind of a full contact sport. Emotionally, things go down. You are losing money in your mind. It's very hard for the human beings cannot be stressed out by that. But if you can learn that markets will fluctuate, it's normal behaviour. As long as your company's reaching good results, the stock price will eventually equal the actual results of the business, and that's what it's all about. I mean, the richest people throughout history, they've built their wealth in a single business. So I've got John D. Rockefeller Standard Oil Andrew Carnegie with Carnegie Steel. Paul Getty. Also in the oil business, Vanderbilt was the railroads. JP Morgan Banking, Steve Jobs, Apple, Bill Gates, Microsoft, Mark Zuckerberg, Facebook, Jeff Bezos, Amazon and you could probably just 1000 down business people that made their money in one business. Well, we're investing in a business. You I don't need more than one business. I mean, as an investor, I'm probably never going to just buy one stock and only on that one stock. Although you could I think if you just bought Google or just bought Berkshire Hathaway just to give two examples, you'll probably end up getting really good results over a long period of time. But I'm not inside those businesses. I'm not a manager in them that has control over them. So I think when it comes to investing in public companies, maybe one company, one stocks a little extreme. But I was giving you this example here to see that in a normal business, only only one company is a normal thing to do. In fact, that's the way to get really, really rich. So when we go to invest our money in public business, it doesn't change. That doesn't change mean Okay, you should buy 50 businesses now because that actually will hurt your results. Could you can't follow what those businesses are doing. So just think about that, okay? Since ownership of a stock is literally part ownership in a business and makes sense to invest in a small number of outstanding business is that you know very well always think of stock ownership ownership in a business, not just a ticket. Simple on a screen. There's a business owner Check the value of their business on a daily basis. No, we don't know exactly how much our business is worth until we try to sell it and we start taking bids. We don't really care or fullest on earnings for focused on quality or focused on running the business, making good decisions, hiring good people ever focused on making money, right? If a business is making money and they're making more money over time, stock will go up. It's a simple is that the tricky thing is timing the market. That's what we say. Don't try to time the market, but you wanna have time in the market. You wanna have your money money working for you for a long period of time in the market. But don't try to time the market. Warren Buffett has said he looked at the market price of Berkshire Hathaway Onley about once every two weeks. Now, if you're an investor, think about how often you check the prices of your stocks, probably every single day. I'm guessing he only looks the price of Berkshire Hathaway every two weeks because of what's the point in checking that he's gonna be holding them stop for years. For decades, what he wants to look at are the results. So he reads the reports. He follows the results of Berkshire's businesses. But why check the price of the stock? I mean, if he wants to add to it, everyone swallowing you look to see if the price has gone down, in which case he's happy. A value investor, a savvy investor is happy with prices of stocks go down because you're gonna have an opportunity to buy. Okay, we're not actually happy when stocks go up because it means that we can buy anymore because they're getting more expensive. So it's It's literally the exact opposite mentality of most investors. If you're gonna be buying stocks over a long period of time, you want prices to be low. If you have, you know, invested all the money you're ever gonna have to invest in the market already. Well, then, yet you gonna want stocks to go, but they're only going to go up based on the rial results of the businesses that you Oh, okay, so that's the end of the sermon there. I just kind of wanted Teoh be a little bit repetitive on this one and give you guys a lot of examples because this is a pretty important concept, and it's one that flies in the face of conventional wisdom on what is even taught in school and what has talked about my so called experts on TV. I say we should listen to what you get the information from the horse's mouth. In this case, the horses are the greatest investors in history, and they are very clear in what they have to tell us and is very clear when you look at their record, what they actually done. And the results have actually gotten by investing in this way. And a lot of this simply has to do with psychology. So that's we're gonna turn to next. We're going to look at something that we call now on behavioral finance and a psychology of invest 12. Lesson 11 The Psychology of Investing: So there's the rules of thumb that Benjamin Graham has talked about when it comes to the psychology of investing, holding stocks and owning stocks. As I've been talking about the other course, it's pretty stressful if you follow the price, moves everything they like. Okay, I'm so excited. My stock went up today. I made money. Oh, no. I stopped when down to their lost money. That's really irrational. Since you know stocks will fluctuate. The nature of the stock market is that it will fluctuate. The price will be going up and down based on the news based on geopolitical things going on in the world. Macro economic events happening in the world, interest rates changing, your stock's gonna fluctuate. Okay, so the thing is not to be checking the price every day and not to be worrying. The thing is, you basically invest your assets and in assets and then wait on one of the things avenging grams that is never buy or sell that for a huge drop or huge rise in price. Don't react when the market has done something extreme, because your problems make a mistake. In that case, just be calm and let things play out as they're going to. If over time you think you made a mistake in your investment or the prospects of the company, you invested in the longer look as good as it used to. By all means. Sell your stuff in the company and reallocate your capital. This is called re balance. Every year or so, they recommend the experts again. I recommend even even Munger and Buffett recommend that you constantly follow your your portfolio. Every once in a while, you might want to reallocate it, re balance it. But they say, don't do that more often than only once a year. And Buffett Munger. They tend to hold stocks that I mentioned earlier for at least five years. But they say it's pretty arbitrary to look at things in terms of one year cycle. Something. Why should Mrs Results coming one year cycles? If you think about it, it's very arbitrary. I mean, it takes time for businesses, develop products and to sell them to the public to get profits and to grow takes time. And so you know, three court three months cycles, which we call 1/4 or one year cycle your arbitrary time now there. Times that are good for giving the public reports right. We can look at the financial statements when you look at the results, but in terms of waiting for a company to bear fruit in terms of our investments longer period of time, usually necessary. And so these guys hold their companies for five year periods. And if they're not getting a good result for five years, well, then it probably means that you're not gonna get the result you're looking for. Maybe you should sell your stock. This just shows you the long time frames that these guys are looking at when they make these investments. And they say, you know, you're making a good investment Doesn't matter bottom when they were Friday. Doesn't matter if you're gonna pay, you know, one or two points of a different price. You know, it means one or 2% points. Maybe you stopped on up a couple of percent during the week. Maybe it's going down a couple percent during the week. We're not looking at the little teeny changes in price. A lot of people that focus on what they call this technical analysis technical investing. You're trying to, you guessed was going to happen. Try to predict was going to happen and you're looking at all these charts. This is what actually is written about the most, and it's on TV. The most is so called technical in house, but we're talking about in this course and what one but bit Munger and Graham and all these guys teaches fundamental analysis because you're looking at the fundamentals of in business . The actual real concrete things were happening, not the technical price movements in the charts. That that's basically Boudou is what they're doing. And it's amazing how much nonsense is out there on TV and the newspapers trying to predict what Price is gonna do. If any of those people could predict what's gonna happen, they would all be billionaires, and they're not. There are not that many really successful investors for the exact reason that the market is unpredictable and diversification is not going to get you there over a long period of time . You mind index fund and you diversify like that, you're gonna get average results that will build wealth for you. As we've said, you don't know what you're doing by the next one. In the long term, your 9% compound returns. That's good. What I'm saying right now is that all those experts on TV they're talking about predicting what's gonna happen in the future. They have no idea what they're talking about. And the results, you know, the record bears that out. So when it comes to this process, we have Teoh have faith in our judgment. When we decide that we found a high probability event that we have a good company selling a good price, it doesn't matter what the market says. A matter of the people say we have to have the courage of our convictions that Benjamin Graham says you're neither right or wrong because other people agree disagree with you. You're right, because your research and your reasoning or right so it does take this very independent mindset to be able to do this of your independent thinker. This is gonna come second nature to you. You're gonna have no problems with this if you tend to be really uncomfortable doing things that are contrarian and different from what the majority is doing, and it's probably gonna be emotionally difficult for you to be a focus investor because it just gonna be true stressful for you. In that case, you'd be better off owning on index fund investing. And anything related to with money has a huge psychological component, and it's actually really surprising to me. It's only been in the last few years that researchers have started look into this and they have his name for it now. Which are you? Medical behavioral finance? Because money and psychology are linked and the past, we've looked at things like the efficient market hypothesis that markets are always efficient. We have all these beautiful theories about money about markets, and they have a mathematical equations that shows how markets should be eight. But they totally left out human psychology and the way humans behave. Which, of course, is actually the primary factor in what drives markets in addition to the results of the companies. So it really blows my mind that this is something that wasn't given any attention at all until the last few years. But any case knowing about it help you be a better investor simply by understanding how people behave in the market and then also understanding how you will feel and behave based on the fluctuations of the prices in the market. Human psychology is perversely misaligned. With the activity of investment, we tend to want to buy and sell at exactly the wrong times. It's very interesting because we're afraid when the market goes down, so we're prone to what sells don't lose money. But that's actually when we should be buying this. Prices are cheaper. They get really excited when prices are going up. That's when we should be selling and reaping our profit. But we feel like we want to make more money to get greedy, and we want to buy more stocks as prices going up. But they're more expensive. It's the exact opposite and what is rational. If you understand investing, you understand markets. But it's very hard to do for the human brain, and a lot of it is based on how we evolved and the way that we are wired to think. And this is why Warren Buffett says be greedy when others are fearful and fearful when others are greedy, where the markets are down crashing. If you have cash you can buy until your heart's content, you want prices to be low, but markets are high and booming. Then you should be either selling stocks and taking money off the table or simply holding, leaving the money in there and be prepared for, you know, several business cycles. If you're looking for like me, I'm planning on having my money in the market for the next 20 years. I seen everything and take it out as long as I have the money from my job and from my business, is my online businesses that will pay my bills. Why should I be buying and selling stocks? I'm gonna let that place it there and compound for as long as possible, save money on taxes, save money on fees and also sleep well night not worrying if my stocks have gone up five or 10% or have gone down 5 10% over the course of the year. Eyes don't worry about it because I invest in companies that have a high probability of producing good results over time. It's really as simple as that challenge is this emotional challenge of not being afraid when prices go down and selling and not being so excited. Prices have gone up and we'll look rich. I'm getting, you know, and buying more and higher prices. Basically, you should not be afraid and prices go down nor excited with prices. Go up. You need to have epidemic e. And I think this is actually really good lesson for life in general. I mean, markets are gonna fluctuate your luck. You know, circumstances in life with lots of ups and downs. And having this non emotional mentality about it is going to get you a much better results and allow you to be much more objective in your decision making, then. Of the vast majority of people, uh, planet so fear of missing out was one of things that causes people to chase high prices when it's most dangerous thing to do, you know, when you are seeing all every neighbors get rich. In the 19 nineties, the big stock market boom was happening, dot com boom and people saw everyone around them getting ritually fast and made them feel like they were missing out. And so even billionaires and investing professionals like George Soros, who normally wouldn't that just in tech stocks was being tons of money into them simply because, you know, they felt stupid of all these idiots are are getting rich and you're not. But you need to be looking at the business and not just doing what everyone else is doing. So this fear of missing out is a psychological factor that could cause people to lose a lot of money and invest when they shouldn't be investing. Fear of losing money causes people to sell stocks when the low price of the markers offering actually presents great buying opportunity. So it's very perverse way that human psychology makes us behave. And Charlie Munger calls us the psychology of human misjudgment certain ways that our brains are misfires because we're emotional when we should be logical, rational and then sort of a perfect storm. But it comes to our money and markets on that makes it very difficult people not to be emotional. We tend to underestimate the power of simplicity. I mean, this is a pretty simple idea. Everything that I'm talking about in this course is not all that complicated. Didn't understand, but it's because it is so simple. A lot of people don't do it, they say. Surely it can't be that simple. It can't be so easy. We just make a couple of investments and then we wait for, you know, our mining to go up. That doesn't sound like it is possible. Surely it must be more complicated than that. I better call my professional financial advisor and have him head on that money for me. He knows what he's doing. I don't think I understand this stuff, and it's that sort of irrational logic that makes people make big mistakes. But actually the process itself, it is simple. Investing is simple, but it's not easy or above us as its symbol. But it's not easy with difficulty lies in the patients in the discipline and not freaking out when stocks are going down. So it's a simple process, buying high quality companies with powerful brands that are very profitable and not trading and crazy evaluations like you know, Apple, for example. I mean, if you buy Apple was trading at 16 times earnings right now, and they have hundreds of $1,000,000 in cash that got pricing, cholera and brand, even though they only have 15% of the world's market share in smartphones, they have 90% of the profits because they have high prices and high margins. They've got that 30% growth and their services business. They've got really smart capital allocation. They have a big stock buyback, thereby make $100 billion in stock over the next year, too. They've got almost 2% dividend. I mean, that's just obvious situation. That is low risk. There's nothing complicated about that. You buy Apple stock, maybe you're not gonna get 30% or 20% returns on money, but you're almost guaranteed to not lose money. And to get an adequate return, maybe 10% compounded over the next decade or two. That's pretty good. If the odds are really high that you're going to get something like a 10% return, you're going to build well pretty quickly doing that. That is not that complicated. You don't need a professional advisor to manage your money. When you can boil down a few of these situations, identify a few good investments. It's really all you need to do. It's the psychology of investing that really makes it difficult for most people. You know, just because something is complex doesn't mean that is good work. Trying to solve this is why Charlie Munger says. We try to find girls that are so low you can just step over them. It also goes back to the other, saying it's a strong Swimmers who drown. Don't look for super complex problems to solve, but it comes to investing look, forward symbols, problems, assault like the apple example that I just I gave you. And this is another reason why it's really good just to wait for crashes if you can't, because when the market crashes now, the prices for stocks have gotten so low that really almost any high quality, well known company that you buy during a recession is gonna give you good results in the years to come simply because of the low price. And this is the way that these guys are thinking they're waiting for low prices right now. In late 2018 Berkshire Hathaway's, um, stock pile, they excuse me cash pile. They have about $116 billion in cash. They're waiting for better prices than not doing. A lot of investment knocks. Prices are high, a lot of uncertainty in the markets, and then they're happy to sit on that catch a lot of people say, Well, they should be doing something with it and they are looking to try to find investments. If they can't find something that now they're talking about, maybe they will just buy back stop because Warren Buffett enjoying wonder they are in favor of buybacks if the stock price is a favorable if it's a low enough price, and right now Berkshire's stock is trading in a small premium to the book value a little bit higher than they would normally buy it back. But they're talking about maybe buying it back. The point is, though, that you're not trying to solve super complicated, difficult investing problems. Simply look for a good place to put your money and then, um, buy it and then wait. And if you do that, you know, if you can master the psychology of investing and and not being afraid, markets go down or even better, taking advantage of price and they go down, you're going to you become financially independent in your lifetime, even if you're only investing a couple 100 bucks a month over time, that will make you financially independent if you're frugal. Frugality is another big component to this that I'm gonna touch on more later in the course . But pretty much anybody who has a job and learns how to be frugal and learns about the basics of investing can become financially independent. Culture makes it difficult. The misinformation out there talking about diversification and such makes it difficult. And misunderstanding of the psychology of investing makes it difficult. But once you kind of clear these things up, all of a sudden you get some clarity. You can see the pathway, toe wealth, and it's right there for the taking for anyone that's willing to listen, toe the advice and the teachings of, um, these guys that are out there every day telling us how to do it. So now we're gonna go from some of those more general ideas and concepts and two more concrete financial concepts. There are a few critically important financial ratios to know when you're looking at a stock and trying to evaluate the price of the stock that I'm going to go through with you now in the next lesson, it's just really important, so make sure that your your alert and ready for this next lesson, especially if you don't have a financial 13. Lesson 12 Must Know Financial Ratios: so the most popular metric use and probably the most important financial ratio to know you're looking The price of a stock is the price to earnings ratio, the price of the stock divided by the profits or earning same thing. Profits. We say profits with the earnings. We see that income. That's all the same of the company in a given years. You want to looking at what is the price of that stock compared to how much money that company is making? So tells you whether the stock is cheap or expensive, relatively speaking, something that he has an example here, let's say you have 10,000 shares of ABC company treating it $10 per share, so that equals a market capitalization of the whole company of $100,000. That would be the entire value of the business that this was a publicly traded company and stock market. 10,000 shares times $10 per share equals $100,000. That's the market cap of the company. Okay, so if the Prophet of ABC company last year was, let's, say, $20,000 when the stock is trading at a current price to earnings or P E of five. Usually that's considered very cheap. You're buying into a business at only five times one years Ernie's and so, especially if that company is growing and its earnings are gonna be going up in the future , we could say this would be probably all things being equal, very smart conservative investments. If the company is losing money or its profits are declining, then Opinion 5 may not seem very cheap anymore. It all depends on how well the company is doing, and you have to learn how to analyze a business for that. But in general, a P E 05 in a publicly traded company is very cheap. And so that's one important thing that we can look at. We're looking at valuing business. We want to look at all the important metrics, but this one is the most popular because it gives you a snapshot of the price of the company based on earnings at a moment in time. So if we purchased 100 shares at $10 a share and then the price advanced $20 a share, we would have a cost basis of $1000. Friday would cost us $1000 investment that we made, and then we would have a profit $1000. We would have doubled our money to $2000. But now the p e of the appreciated stock is 10 assuming that profits haven't changed. But people just may be reevaluated his company and said, You know what? This is a good companies. Maybe there's some news that came out about of plans the company has for dividend for stock buyback or new products that they're going to release that scene that they will do very well stocked. Might advance in this case, you said, with multiple will increase the price to earnings. Multiple. It was five. Now it's gone up to 10. So a lot of times a really good company that has favorable future prospects will go up in price, meaning the stock will go up because people expect it. Do you have higher earnings in the future? In a lot of times, you know, it's easy to see that that will probably happen and so we can see that. So now the P e of the appreciated stock is 10 is trading at 10 times earnings, which is relatively more expensive than when straying it five times earnings on Lee. If the company is growing revenues, Proctor growing a p e of 10 may still be pretty cheap, depending on the industry. Okay, every industry has a different sort of average or normal price to earnings ratio. Tech companies to hire p ease because they tended, be growing rapidly and have a look at business models. And there's some of the older industrial type stocks companies air not growing as rapidly or maybe even just like the banking industry. For example, they tend to have pes that are lower, and they trade closer to their book value, which is a a ratio price of book that we're going to look at next. That's just a basic example of how price to earnings is calculated and how we wanna think about it. Next one to look at his price to book is the price of the stock total market capitalization of the business. That's all the stock outstanding. Invited by the total book value of the company, the book value of a company is all of its assets minus liabilities, so assets means things like property, plant and equipment cash inventory things of the company owes and liabilities would be things like debts or accounts payable anything that is owed Any money that is going out are the liabilities. You look at the Net assets, you take out all the liabilities looking net assets of the company. So let's say the market cap of the company is $100,000 then you divide it by all excluding . Subtract out all the liabilities, and then you divide the price by the book value, and it gives you a ratio. So ABC companies book value. Let's say it's $50,000. That's an inventory because it's real estate and then some track out. The debt is just basic example. So see the book value is $50,000 but the market capitalization of the stock the value of the company according to the market, is $100,000. If you saw the previous example, there's 10,000 shares outstanding, and they sell it $10 a share, the value of the company's $100,000. But the company's book value, it's just it's assets not thinking anything about earnings or profit training is about $50,000 Okay, so you do really simple. You take the $100,000 market cap and you divide the $50,000 of, uh, book value and you get the number two. That means that the stock is trading at two times book value, so A. B C's price? The book is too now. For most companies, that would be a reasonable amount to pay. Or maybe even cheap looking, a tech company that is asset light. Most of its assets are like software and intangible things like that, then a p b a price. The book of To is very little lot of companies selling at prices The Book of 789 times. Now, when companies have a lot more assets than about a lot more of factories and a property, plant equipment and inventory and usually the price to book is gonna be lower because it's gonna be a much larger asset base to divide from, for example, is not a typical for, um, banks to trade at around their book value because they have so much cash and assets inside the business. So in general, you want to be looking at a price to book ratio that is lower. If it's one, it means that the price of the stock is trading in the same value of the assets of the company. And the reason that would normally be considered very, very cheap is because it's not taking into account all the profits of companies make. I mean, the company has $100,000 in assets and the market cap of the company is $100,000. Then you're getting all those profits for free, basically, so it will make the stock look very, very cheap indeed. This is what Benjamin Graham I used to do during the Great Depression, and she would find all these companies over trading at very, very low valuations below book value because the market was depressed, everyone was super pessimistic. There was no money going around and he would be investing stock. And he's tough. He's buying buying stock in these companies, knowing that even if they went bankrupt and had to be liquidated, they actually had the physical assets that could be sold off and then pay all the stock owners off at a profit. Okay, so this practice book value is something that conservative investors look at to say, no matter what happens in the business, that value of the assets actually back up the market capitalization of the stock. So it's an important metric for conservative investors. A lot of investors own look at price to earnings. Only look at the earnings, the profits. But if you want to be conservative and you're worried about not losing money, especially view someone likes to buy bonds, you want to be able to look and see what's the worst case scenario here. How much and assets does this company have in the 1990 dot com boom? A lot of these companies are treating it multi $1,000,000,000 valuations. I have, like zero assets. They just have, like a website, and people expected them to have, you know, this great future prospects. But they had no assets behind the stock, and in the old days they would call that it was nothing but water behind the stock. It was a water down issue because it wasn't back by physical assets. So depending on the industry, you know, price of Book of two could be considered cheap or expensive for a bank. It actually might be considered to be a little bit pricey, depending on the market for tech stock, Oppressive Book of two would be considered probably really cheap because normally, cos they have a lot of earnings and very little assets relative to their earnings. So this is an important rationing. Think about the main idea here. Just understand that a price to book value of one means that the market cap people's the company's assets. So any company that is trading at a ratio less than one is a very, very cheap stock, even if the company is not a very good company because it means that the market cap the price of its stock on the open market is trading at less than the actual physical assets of the company. After you take out all of its debt after you take out its liabilities, right, that's why we call the book. But the book value is the value of the company's assets after you've stripped out all the debts and liabilities, okay, so it's important concept. It's one that is overlooked probably a lot more now than it used to be now that we have so many companies that are based on services and technology rather than what most companies used to be, based on which were, you know, realistic companies, banks, manufacturing plants and physical assets. The nature of most companies. The market has changed over the last 50 60 years, and it continues. Teoh lean towards of services and tech. But this concept is still really important. And you can bet your bottom dollar that Warren Buffett, Charlie Munger look at book value when they're evaluating an asset because it looked at every metric that has to do with the companies value. And this is a very concrete ratio that tells you something real about the business. I mean, you do nothing else but go around. And by businesses that trading at less than the book value, you're probably gonna get adequate results. You may not become supervision, Warren Buffett, but the odds that you're going to lose money by doing that are very low. In fact, this is all of Benjamin Graham did during the Great Depression. Use went around and found companies that were trading at a big discount to their book value . In those days, there were a lot of them. Nowadays, there aren't very many because stocks have appreciated so much, and they're trading at much higher valuations. He didn't even care what the prospects of the business work. He would just try to find companies over trading at the biggest possible discounts to their book value. He'd buy those and wait until they appreciated Which, of course, they always did. Because in the long run, the markets a weighing machine right short term is a voting machine. In the long run, it's a weighing machine. Eventually, the price will go up if the if the price is is so out of whack. So lo. And this is why the market is not totally official. The efficient market hypothesis is flawed. Markets, in the long run, are highly efficient markets in the short run. If I need to be the short run in this case might be a few years can be inefficient. And that's the reason why you think focused portfolio. And people like Warren Buffett, Charlie Munger, etcetera, have been able to beat the market consistently for decades and decades and decades. They find value that other people don't see, and the price to book is a concrete measurement of companies value. Okay, that's another important one next one kind of bridges that two. Whereas the P looks at the price to the earnings, the price to the profits, the PV looks at the price to book, which is the price to the assets. The return on equity gives you this sort of efficiency ratio is saying, based on how much value, how much capital the company has based on the company's assets. How much money isn't making off of that capital? What's its capital return? What's its return on equity? Okay, now, equity includes assets and liabilities because if you think about it, you borrow money in order to do something in a business. Yes, you have the debt. Yes, you pay interest on that debt, but you have the Caps Cube all right, and so that's equity. So if I borrow $100,000 to buy a house, there's equity there and at the price of the house goes up, I'm using that that debt, that equity to build Well, right. If I put a $5000 down payment on $100,000 house, I control an asset of $100 dollars, with 95% of that is, debt is debt equity. But if that $100 no asset goes up 10% in value in a year, I will have a a game on the books a, um, capital gain of $10,000 I use my leverage. I used the equity that I borrowed in order to make that $10,000 games. That's a way to think about. So the return on equity is an efficiency ratio that tells you how well company is using its capital. Okay, And that's why these three ratios are three of the most important because they give you an overall picture of the financial health of a business one based on earnings, one based on assets and then one based on how officially, the management is deploying the equity of the business. So this example, ABC company has net income right profits of $100,000 say they have equity of $150,000. Let's say in this case at their inventory, that's a realist day, and that's also their debt come combined. So if you say ABC companies are we in this case, it would be 66%. You just divide the, um income profits by the equity and actually 60% very, very high, depending on the industry are on our own. We of about 15%. It's pretty good. That's that means we're getting 15% on their equity on their capital step might be considered a normal again. Every industry is different. Okay, if it's ah Tech company and they have relatively little debt or assets like Google and there there are elite is actually gonna look kind of low because they don't have any assets . Their assets are intellectual property and software. And so it's not like they have billions and billions of dollars worth of real estate manufacturing plants and all those kinds of things, relatively speaking, for this for the size of the business. So you see a tipple company and there are only used 20 or 30 usually looks really good. That means they're getting a good return on their assets. In this example, I've given you you look at our elite 66%. That means the company is super efficient, based on the assets that it has based on the equity and the value of the business itself. They're getting a really high return on that. This is a region that Warren Buffett likes to look at because he's a capital allocator. He wants to look at how much money is a company creating based on how much money it has, because his whole entire career, his whole entire skill set, is allocating capital and investing. So when you look at Berkshire Hathaway, his company, a big part of it is it's equity portfolio stocks of the own and then the majority of now are just the portfolio of all the companies that they own 100%. And so they have a combination of the 22 big conglomerate. It's a different than how most companies are structured, so it's really hard to value Berkshire Hathaway. You just look at P E because if you look at the price of earning, it doesn't show you all of their of capital gains from their stock carefully. They haven't sold those stocks, but if you just look at the book value, it doesn't really take into effect. You know all the earnings from their operating. This is which is, which is why warm up, A says well, in their case, waited it to judge Berkshire Hathaway is Teoh. Use book value and use return on equity, and that gives you a snapshot of the value that business. That may not be perfect, but it will give you an approximation of the value. So every company is different, every type of companies different. But these three different ratios give you an overall picture that we pretty accurate in general when it comes looking at the price of the stock. Okay, so on r o e could be thought of as a bridge between the P and the PB ratios is an efficiency ratio and those three most important ratios. Now there's lots of other ratios that we're not gonna go into in this course, because there's you can go on forever. You could take a long, long finance class or even 100 finance passes Looking at what all the different possible ratios I can tell you about a business, but these three carry most of the freight, their most important. And if you, if you understand deeply what these three different ratios are telling you about a business , it will give you most of the information that you need to know when you're analyzing the price of the stock, especially if you're new to finance as me. And you probably are that are listening to this right now. Uh, this will give you a really great introduction, Teoh. Being able to look at valuing a business, okay. And next, we're gonna look at the financial statements themselves and what they will tell us about business. 14. Lesson 13 Understanding the Financial Statements: So there are three main financial statements of any business there. The income statement, the balance sheet in the statement of cash flows, the income statement shows profits or losses for a period of time. Usually it will be for 1/4 which is three months and then, um annually, which is for one year of income statements for the different period of time. Same thing goes for the balance sheet and statement of cash flows. The balance sheet gives a snapshot of current assets and liabilities. So, like I was talking about with the price to book, you can look at the balance sheet and see what the company owns and what the company goes. Okay, saving cash flows. This tells you how cash is moving in and out of the business, so it might look like the company has a lot of cash. But if that captures coming into the business because of debt and the fact that they're borrowing it, you can look at the balance sheet and say, Oh, the company had tons of cash, but a lot of it is debt, so that's not really good, you know. So cash comes into the business in many different ways. It's not just from the sale of products it could be from issuing stock and getting people to invest in the company of the business right? That's what public markets before. I mean, companies that list themselves on the stock markets are doing so in order to sell stock, and they take our money. You just best in public money and they re invested in their products and services is a way for them to capitalize the business. Borrowing money from a bank and paying interest on that loan is a different way to capitalize the business. So the public markets are one way. Debt is another way. And of course, the best way to have money come into a business is through the sale of polyps and services , which is the only way the companies wouldn't be viable over the long run. But understanding this helps you to read the balance sheet and statement of cash flows. So some businesses are very every bad cash float because of the way they collect cash to send up receivables, and they get money back a lot later than um, they would like. But they have to pay bills now, and so they have chronic cash flow problems. Other businesses are very good in terms of cash. Full one example of a good casual business is typical of fitness center or a gym, because when you open a gym, actually have a course about this. Because I launched a gym a few years ago, it was very, very good business model is that you lay out all this cash upfront. Let's see you open a gym for $100,000 you buy all these machines and you rent the space and everything you need. Basically, almost all of your money is laid out at the beginning, and then afterwards you just sell memberships, whether or not people use those memberships as a matter, they're basically renting the option to come in there and use your machines. And so when they pay cash for their memberships, or if they set it up with what most gyms do now, where the money is automatically taken out of their bank accounts for the monthly membership every month you are very, very big cash blur getting cash up front and you sell a yearly membership at a discount. So instead of being $50 a month, for example, you say, OK, we'll give you just kind of. So you a yearly membership. For $500 you get $500 in cash in the business right now for the whole year, you do the same thing with even longer terms. That one thing that gyms are doing now is it. So lifetime memberships. And it's a way to get a lot of cash to come into the business that someone may not even be using that services. For example, you saw a lifetime membership for your gym for $3000.5000 dollars or you maybe even $10,000 someone thinking I was a pretty good deal if I know for sure that live in this town and I'm gonna use his gym for 20 years or 30 years paying $5000 right now against me if you just get you may calculate that it only cost you $10 a month for the life of the membership as we're getting a huge discount. But terms of the business point of view it's great for their cash, really cash coming in now and never has to be laid out. This is the same thing with insurance companies. Insurance companies make money now and then they pay out claims later. In between all the money they have that you paid into their they invested. It's called Float. Same thing with the bank. The bank takes deposits from you. Those that money is sitting in the bank account. But the bank is allowed to invest your money while it's in there as long as they keep a certain amount of capital reserves, whether it's 10% or 20% the rules are always changing with banks. They have to keep a certain amount and actual cash so they have enough to cover deposits and the odds of 100% of people coming and taking the money out of the bank at the same time or zero. And so most of the money that the bank has is invested, and that's how they make their money off reinvesting the deposits. Okay, so that's just sort of a crash course in cash book. But some businesses, for example, my parents have a business that's Ah, bookstore and office supply store. They've been running for about 40 years. Used to be a great business. Before. There was a lot of competition from the likes of Amazon, WalMart and Staples, which is a big box officer, Black Cos he's not really high margins. People would pay cash or people would pay on time, and the cash flow was pretty good. But now, since there's so many different competitors out there that are willing, Teoh sell on credit and incentives. A statement following month. I'm now the cash flow of that business model. It's not good anymore because basically, my dad, we grow the cells off supplies to people and the sense of an invoice the next month. And then he'll get the money back, maybe one or two months after he's made the sale. But he has to pay his bills and by, um, that product to resell from his suppliers earlier. So he has chronic cash full problems now, and that's not what you want. So even though his business makes a profit and it makes a good profit at that, he's constantly having his cash flow problems where is trying to get money to come in so he can pay his bills and he's always trying to chase people down for cash because most of the sales that he makes in terms of the office supplies are on credit. So businesses that make a lot of sales on credit are prone to have cash full problems. It's anyway. Statement of cash flows will show you how the money moves in and out of the company, and you don't want to be investing in businesses that have chronic casual problems. You want companies that have really good cash flow. Okay, you know, accounting. Basically at its core, it's the language of business. So understanding financial statements is really the key to investing. If you understand eventual statements, you can understand how healthy businesses, how much money they're making, whether money is how much that they have, whether another profits and revenues are growing or not. Why it's all there in the financial state with the skull. Fundamental analysis. No, I actually hate accounting student kinds of accounting, this financial accounting as managerial county. We're talking about his managerial county. We're looking at the statements as managers or as investors and seeing what do they mean? We're analyzing them are making investment decisions. Financial accounting is what actual captains do where they take every single, um, expensive business, every single amount of income and then create the financial statements from them. It's, you know, it's basically it's bookkeeping, They keep the books and they duel the accounting. To me, that is extremely tedious and not very fun. But I like to be able to analyze the statements that the accountants make. In any case, if you want to be a good investor, you need to be able to understand accounting. And the most important Banjul statement out of all these statements is, of course, the income statement, because it shows you the company's profits and losses. Statement castles is important. The balance she is important, but ultimately the stock price of a company and the success of that company is gonna be based on how much money does the company make right? So you needed to be able to look at the income statement and ideally, you want to be seeing growing income over time of profits are constantly going up, the stock is going to go up. It's a simple as that, and if the income is stable and not going up, but it's staying about the same, that could still be a good investment as long as management of the company is reinvesting those profits in an efficient manner. And this is why things like the return on equity or important or the return of the company gives to shareholders is important is important, for example, that dividends and buybacks. When a company gets a dividend, they're paying money back to shareholders in a company buy back stock. And they're putting upward pressure on the value of stock because they're they're retiring share if they're buying shares back, and that boosts the price of the stock. That's a way to give money back to owners of stock, uh, shareholders. Okay, so even if a company's profits in up growing, if the price of the stock is a good value, a lot of companies have good dividends. Good buybacks and stable profits were still end up being really good Investment doesn't have to be a stupor, fast growing business to be a good investment, But the income statement will tell you all those things. So it's the most important statement toe look at the main thing. We want to see a healthy company, but we're considering for investment is large and growing income, right? That's what we're looking for. And then, of course, once we identify companies that have really high earnings and rapidly growing earnings, and trick is to understand and be able to evaluate, what is a fair price to pay for the that stock? Is it too expensive? Is it a fair price? Or, ideally, is it undervalue? Warren Buffett? Charlie Munger filled Fisher, Benjamin Graham, the great investors in history. I mean, there are thousands of them. These guys are just the most famous and most most skilled. They are able to identify under valued businesses, and they make huge investments when they identify those situations, and then they make huge profits over time. That's really what it boils down to. And so the whole skill of investing is finding mispriced bet or waiting for, ah, fat pitch. As I say, whatever analogy we want to use that is what we are doing in a financial statements will give us information that we need in order to make those evaluations. Other financial metrics toe watch for intervention statements are profit margins. How much profit is a company making per unit of sales? I mentioned how Apple has really high profit markets. They make a lot more money than all of the other smart phone makers combined, even though they're volumes are lower than a lot of other companies like Samsung, for example, there volumes or lower. But there martin their higher, and they make a lot more money. So looking at profit margins is important. Facebook and Google have really high profit margins because they're in a lot of money out of their advertising compared to their costs of users, which in Facebook's case is basically free because people post stuff on there about, you know, their families about their lives. And Facebook is monetizing our information there. Costs are servers and human resource costs of their employees and things like that. But they have really high profit margins because of their business model. You wanna look at trends related to expenses? You want to know that trip that expenses are not going up, and if they're going up our profits also going up, why expenses going up? So you want to be looking at it costs you want to be looking at translate to revenue profits. Obviously, we want revenue crops to be going up and So we You analyze a business, you want to be looking at these trends, and if you have just think about you own your own business every year. Hopefully, you want your profits to be going up. You want your revenue to be going up. If your expenses are going up and your revenue is going down, that means your profits going down. And maybe you have a problem on your hands. Are those trends short term or the long term? And so these are things that we think about when we analyze a business. And again, if this all sounds way too complicated for you, or it's just not interesting just by a total Stock Market index fund like a Vanguard fund and take the average results, sleep well at night and don't even worry about it, Um, as I said before. But if you find this to be fascinating, well, then hopefully you guys are enjoying this, and really, I'm giving you guys, uh, the bulk of the information that you need to be able to analyze the business. It's not much more complicated than everything that you covered in this course of you learn 100% and apply 100% of what you learned this in this one course that you're listening to you right now, you will be a really good investor because this is based on not only all my experience teaching business and investing, but then ingesting dozens and dozens of books and articles and information from Warren Buffett, Charlie Munger, Benjamin Graham, Phil Fisher and many, many other of the best investors. So I'm trying to boil all of that experience knowledge down into easy to understand bite size lessons. So I hope you guys are hoping their enjoying your and you're paying attention and course. Finally, you want to get debt levels. You want debt to be relatively low, but some leverage, which is just another word for debt, can help boost returns. Ondas manageable. The reason they call debt leverage is because, I mean, you think about like a typical house again to use as an example. If you buy $100,000 property and you only put 5% down payment down, you are controlling $100,000 asset for only $5000. That's the use of leverage You borrowed $95,000 to buy that property, you leveraged that property. And if it goes up in value, you're gonna getting a really high return off of that $5000 investment, you're gonna have a lot of debt, especially in real estate. You gotta calm Creek Asset to back that up. Which is why banks, of course, are more than happy to lend money in the form of mortgages for real estate. Because it's so concrete and literally there's concrete there. But you can just a bank could just, um, take that house and resell it and get their money back. Okay, So something in a business, if you have the ability to borrow money and boost your returns in many cases, it's very logical to do so. So having zero debt levels actually doesn't make sense. You could be a more efficient enterprise with some debt, because debt equals Levitt and really just depends on the business. Some businesses, their so profitable it doesn't make sense to borrow money and pay interest on it. For example, ghoul has almost no debt. All they have over 100,000 are excuse me, $100 billion in cash. They have really high profit margins, and they only have, like, three or $4 billion in debt. I mean, why would Google borrow money? Will they have so much cash? They have problems allocating the caps that they have now, so it doesn't make any sense of all of money. Apple. They are more leveraged because they had a huge amount, their profits being held overseas. And up until recently, when on the tax code was revised, the United States taxes on foreign earned income were really high. There were, like 35%. So apple. Instead of bringing up money back to the U. S and paying 35% in taxes, they were keeping it all outside the U. S and borrowing money at low interest rates. It was a more efficient thing to do. So, looking at debt levels, understanding why company debt is what it is can help you determine whether or not the debt is a problem or whether or not they are operating efficiently. So you always want to look at a company that sells in general, lower debt is better. If you have a company that has really high debt levels, then that could be a problem they're paying a lot of interest on that debt on Maybe they took on that debt for bad reasons may be from a position of weakness, and that's probably a big warning sign that you want to stay away from that stop. Okay, so one of the ratios that tells you how much data company, as is called the current ratio, it tells you how much cash the company has available relative to its liabilities. Money that has has to go out, usually for debt or things like accounts payable. And so again, I told you guys, this is winking ratios to look at. But one called the current ratio is a sort of a snapshot of the company's, uh, cash levels to debt liabilities. So that's another thing that you want to look at. OK, so I think that's enough information about financial statements. It's a service super crash course in those things, but those are the things that you want to be thinking about in terms of the fundamental financials of a business to determine whether or not it's healthy business and whether or not it is a good investment based on the price of the stock and next. We're gonna look at something that's more subjective, more qualitative in nature, but also really important. It's hard to measure, and so a lot of investors basically don't measure it, which is a big mistake. If you can't put it into eventual statement, they think, well, maybe we shouldn't even be thinking about it. But the quality of a company's management says the management, are the ones making the actual decisions about what to do in the business. It's super important, and Charlie Munger and Warren Buffett place great emphasis on the management. That's what we're gonna 15. Lesson 14 Evaluating Management: Warren Buffett time longer. They want manage that. These three key traits. They want to have integrity. They wouldn't have intelligence and they wanted to have energy and say they don't have the 1st 1 The next two will kill you, right? They're emphasizing that they value integrity above all else. And if they don't have integrity and you don't want the manager to be intelligent and energetic, you want them to be lazy right on and stupid, because otherwise they're going to cause a lot of damage to the business. Everything hinges on integrity, as we've seen a lot of the scandal scandals like Enron Scandal of Tyco scandal, lots of different business scandals out there recently, there was a drug company scandal, and valiant enough. You're aware of that one. Or there is some really horrible behavior going on with the management causing the stock to lose 90% of his value when a lot of things came to light. Basically, if you see any enterprise, their behavior, because if you see any unethical behavior anything that even seems like unethical behavior , you've probably got a problem with your hands because of this said before, there's really one cockroach in the kitchen. If you see anything that smacks of dishonesty for management running the other direction you want. Managers toe have integrity, intelligence and energy because this whole philosophy of investing is not losing money. Aziz looking for safety of principal at an adequate return There's no faster way to lose money than have dishonest management doing unethical things and have that come to light. And all of a sudden the whole business can basically implode based on those things. So you got a stable business with high, uh, integrity management, smart management, and you're probably gonna have a business that is going to be a good investment. And this is another reason, I think, why Warren Buffett, Charlie longer. They like Apple because the management they obviously are doing smart things of their capital. And since Warren Buffett, Charlie Munger are are fundamentally capital allocators at heart, which is basically is another word for investors, right, because when you're investing your allocating capital, they see that doing smart things with their money. They're not doing any really big acquisitions, which tend to often times reduced value rather than increased value. Their biggest acquisition was $3 billion they paid for beats, which is a headphones company, and that $3 billion is there is a drop in the bucket for companies. Big Apple. Instead, what they do with their money is they reinvest in their core products, like the iPhone, and then they they haven't dividends. They pay money back to shareholders, and they buy back stock because their stock trade that, if pretty reasonable price all the time. People are constantly worried that of reached peak iPhone, that their sales eventually love to drop off and that the apple simply such a big company being the most valuable company in the world. But it can't grow forever. Eso that keeps the price of the stock at a reasonable level, allowing management to take its hundreds of billions of dollars and buy back stock, which supports the price of the stock and over time, will push the price of the stock upwards and so more buff. Enjoy Munger. They identify the intelligence of Apple's management. They seem to have obvious integrity. They focus a lot of privacy. We have encryption and their devices. They haven't had any scandals, and they're pretty proactive. Even though Apple hasn't come out with a revolutionary product since Steve Jobs died. Who was the pioneer that invented a lot of this stuff, including the iPhone. The company has been executing very, very well even in allocating capital very, very well. And they just been managing the company very well, and this is a big deal. If you've got really good management in charge of a really powerful brand and a very profitable business, good things were going toe happen. It's not rocket science. It's pretty simple. So but a lot of stock market analysts, they either don't think about the quality of management or they discounted, and you shouldn't do that. I mean, you really should be buying businesses that you can feel comfortable owning knowing that the people who are in charge of that business, you know of it is that you own a partial stake in have your best interests at heart. You can't say that for sure, but a management Why would you want to invest in that company? I mean, those people's decisions are going Teoh, you know, determine whether or not your investment is profitable or not, and whether or not you lose your hard earned money so the integrity and the intelligence and skill of management is really important. In some cases, it's hard to tell where the management is very skilled. Read the financial statements and you can read the annual reports. In some cases, it's kind of hard to determine really how talented management is. In that case, Warren Buffett, Charlie Munger would put it in what they call the too hard pile and move on. They wait for the fat pitch. We don't have to swing at every pitch, but every once a while, really good management comes along and you go. This guy, albeit obviously knows what he's doing. He's obviously a person of integrity, and the business is good business. Then the only decision you have to make is OK. Is the price of the stock trading at a reasonable level? Right now? The answer is yes, you make an investment. And if you think the price is too high because a lot of other people have also identified the high value of that business, then maybe it's a risky investment of spike. In fact, that's a really strong, powerful company. A good example. This is Amazon. Jeff Bezos is pretty obviously a genius. Amazon is continuing to grow at extraordinarily high rates, despite the fact that they're huge business now, and they continue to disrupt all different types of industries. But does that mean Amazon is a good investment? Is really hard to say because it trades at over 200 times earnings. So you know you can't pay an infinite price for a stock, no matter how high quality the company is. And so Amazon is an amazing company, and it's obvious. But do the high price of the stock. It's not obvious that is a good investment, whereas Apple is a super strong company, and it's obvious. But due to the fact that it trades only 16 or 17 times earnings and has so much going for it, um, it appears to be a really smart investment that may not return. What Amazon Me, Richard. In the next 10 years, Amazon stock might crush the returns of apple, but it also go down a lot, and you could lose your money, whereas the odds of apples stopped going down are almost zero. So you're looking at getting a almost guaranteed return, a modest return, an adequate return versus maybe getting a much higher return, but also possibly losing money. And so the great investors throughout time they would. They would always choose a company like Apple over Amazon, based on the fact that what you can analyze, what you can see is very concrete. Real. It's the old saying that one of the hand is worth two in the bush with Apple. You can see what's in your hand, and you can see what's in the bush, probably with Amazon. It's hard to say what's in your hand because the practice so high. And it's hard to say how many birds in the bush because of the complexity of the business and the rapid, the changing nature of the industries and interacts with. And so I think that's a really good example for you guys to think about when you think about investing and this definition that we laid out of the beginning of the course of getting a safety of principal and an adequate return. Okay, so more on management. It doesn't matter how smart management is. If they're dishonest, they could destroy the company. So no matter how good a business looks, if the management looks dishonest. It's gonna probably a risky investment. Stay away from that company again. There's really one cockroach in the kitchen. Even if you catch a whiff of dishonesty for management, you should probably avoid the company. This honestly can usually be sniffed out with careful reading of the company annual reports , especially when you read the notes usually have imagined Want to hide something that's, Ah, negative about a company that put it in the footnotes in the annual reports, and they'll have little asterisks next toe certain items and you go down and they'll explain that away and really complicated financial jargon. And basically, it's too difficult to understand or a little bit mysterious about what they're saying. Um, stay away. Nothing should be a mystery when you're reading the annual reports. That is something that Warren Buffett Munger constantly talk about. They're saying, If we don't understand it, we understand something that saying we just don't invest in a business. It's a simple as that. Why take a risk with something that is so complicated that even warn buffer but that can't understand? That's, uh, pretty obvious red flag. Ah, high levels of integrity. They become relatively rare it seems like in today's corporate world, so identifying it should make a company really stand out when you see a business that is doing things that is obviously high on the integrity list, and you can do pretty much rest assured that the company is in good hands, and that will be a really good general indicator for the future of the business. As long as a company that we're talking about is profitable and has favorable future prospects, right management isn't everything, but it's one really important piece of the puzzle. A. Benjamin Franklin said that honesty is the best policy in say, honesty is the best way to behave, he said, is the best policy. It's not just because it keeps you out of trouble but integrity. You know it's moral, but at least you you having a good reputation in business, and this shows up as goodwill. In other words, integrity in a business actually have a monetary value. When you have a really good reputation, people more likely to refer you to their friends and more likely to be repeat customers and the more likely to continue to spend money on your business. And this is one of the powers of brands. It's the power of the reputation of a brand and why it's so important to manage that reputation. And so honesty is the best policy in business. Having a management with high integrity has actual value for the company. Most people don't think about this the thing about investing in a business. But you guys should think about this because it's a very riel thing. And like I said earlier, just because something can't be measured quantitatively in terms of numbers on a financial statement, it doesn't mean that we shouldn't try to measure it. You can't measure it exactly. There's no exact value for a management that has integrity. But just because it can't be measured exactly doesn't mean that it should be ignored because it's riel. And this is again why investing is is an art, and it's not a science. It's kind of a combination between art and science As Robert Hags film, He's an author who writes a lot about Berkshire Hathaway. Warren Buffett. He has put it, he says. Investing is the last liberal art and actually has a book that I highly recommend. Called Invest Investing is the last liberal art. And that explains this. This are of valuing a business. It's, um it's not so easy on. It's very, very fascinating and interesting, which is why I love it. But the rewards you get from being skilled at it are that you become wealthy, or at least you become relatively well to do, Let's say or above us, says it's pretty easy to be well to do slowly, but it's difficult to get rich quick and this whole philosophy of looking for a safety of principal an adequate return. You know, we're pretty much guaranteed not to get rich overnight with this philosophy, But we're also pretty much guarantee to slowly get wealthy if you patient, and that's pretty good situation to be in. I like the idea of sleeping well at night, not worrying about my money, my investments crashing 50% overnight of knowing the overtime. I'm probably gonna be financially independent that that makes me feel good. And so this is big psychological aspect to investing that usually using the emphasize that much we use into the pundits talking TV or you read articles about investing. But it's a very riel and a very important aspect of this art form that we call investing and, you know, reputation, Warren Buffett says. It takes 20 years to build a good reputation and only five minutes to lose it. And so when you can identify a company, it has a really good reputation and whose management has a really good reputation. Has a lot of value in that. And it's pretty easy to measure, in a sense, because it's a qualitative thing. And so instead of having to look a ones and zeros and figures, um, it's something that you just can't sort of get a sense off and make a decision based on that okay and last about Management says the most important skill top management is capital allocation. It's also the most repaired. It's funny because most CEOs they rise to the rank due to skill in a specific area business like marketing or HR, Law and engineering Or maybe even that is really good at corporate politics, and many of them end up being very poor capital allocators. But when you become the CEO, all of a sudden you're in charge of allocating many cases billions of dollars of capital and as investors. It's really critical to us what the money in a business is used for. And so Warren Buffett, he looks or management that has capital allocation skilled again. This is one of the reasons why he likes Apple. He sees them doing very logical things with their capital, with their cash making, small acquisitions, not huge acquisition, investing in research and development, investing in their own stock with buyback and having a dividend, he said. This is all very logical to do, and so this is the most important skill of, ah, management capital allocation. But most managers don't actually have. So you can identify a CEO who is really good capital allocators than that's a really good indicator for that investment. This is something that also warned about recognized in Robert Gazeta in Coca Cola in the 19 eighties. He saw that he was doing really smart things with the company's capital. It was reinvesting into their Number one product, which was the original Coca Cola brand, and he was selling off some of the less efficient businesses that previous management had acquired. There's kind of a bad habit a lot of CEOs tend to want to create some giant conglomerate, some big company, and they make a lot of acquisitions that are not actually adding value to the business. We should be reinvesting back into our our highest margin businesses or core businesses usually. And he saw management Coca Cola doing that in the eighties, which is one of the reasons why the results started to get so good. And Warren Buffett like to see that behavior was one of the main reasons that he invested in Coca Cola. In addition to the fact that it's just a good business in general. No, I want to do with the company's capital increases value for shareholders will not allocating and wisely it actually destroys shareholder value. If a CEO takes capital that's coming to the business through the sales of the company's products and services and then doesn't use it well, they're wasting money is a simple way to put it, and they're wasting our money. I mean, the money of a publicly traded companies, your money, it's my money. If we own shares in that business, and if the management doesn't use it wisely, they're throwing our money away, and it's really that's literally what's happening so you want the managers of business to be good capital allocators, being able to identify management that are high skilled, a capital location and separated outstanding from mediocre investment justice. One thing is so important and again, one of the main reasons buffet bar, Coca Cola and Apple due to these two trades. So it's a good thing to think about. Make sure that you guys don't make any investments in a publicly traded company in the stock market without at least thinking about who the managers are. And looking into their background is a little bit because it makes a huge difference over the lifetime of your investment. Okay, so I hope you guys have gotten a lot out of this course. I tried to make it as informative as possible, and in the final lesson, we're gonna go over some of the main points that I want to emphasize 16. Lesson 15 Review of Key Ideas: So just remember, this intelligent investing is simple, but it's not easy, just like pretty much anything in life. You can bull down the main concepts to the point where anyone can understand it. But it's not easy due to the emotional nature and due to the discipline that is involved, mostly a discipline of patients faced Maurin character indiscipline. And tell us this should be heartening to most of us who probably don't feel like geniuses that are never going to understand finance as well. As you know, the people in the ivory towers of universities. You don't need to. You multi, just need to be able to buy and hold stops of good companies and not pay too much for them when you do so, the intelligent investor very patient and understands the language of accounting. Okay, we understand the language of the County Council. I I spent some time in this lesson of going over some of those ratios, going over the financial statements, what they mean and just emphasizing the fact that if you don't understand accounting, not ever. I mean, you're never gonna be a good investor unless you just want to buy a low cost index funds. You need to be fluent in the language of accounting. Intelligent investor is conservative and doesn't expect miracles. But because of this mentality is actually more likely to get outstanding results with very paradoxical. By being conservative and not expecting outstanding results, you're gonna be investing in stocks that are safer and by investing and stop their safer and that have virtually no downside improbabilities that you're gonna have more upside of increase. And so that's what it's all about. We want to be conservative. Don't expect miracles. We want safety of principal, an adequate, richer. The intelligent investor looks for value for money stocks that are trading at or below their intrinsic value. It's a simple as that value is what you get. Money is what you pay, and the whole name of the game is getting more value. And what you hey, for can a good example, for this is looking like when you buy a car. When you buy a new car, you drive it off the lot. You pay full price for that car. You're immediately immediately losing a huge chunk of value of resell value. You can literally sell that car. The next day have only driven it for one day and have to sell it for several $1000 us. And you bought it for so in order to make a good investment when you buy a car, the thing to do is to get value for money. Buy a used car has been very well maintained in a brand that's known for being very reliable. So that means when you buy a car, usually if you're looking Onley it value. You want to buy a Japanese car that's been very well maintained, like a Honda or Toyota that's been driven for a few years, and you may even be able to drive that car for a few years and then we sell it and make a profit off. But I've been that multiple cars okay, so I just think it's a good metaphor for value investing you're looking at. How much value can you get for the money that you're laying out? It's a simple is that the intelligent investor knows had a value of business and read the financial statements. You understand the financial statements are telling you, you can, uh, estimate how much that company is worth, and determine whether not to make an investment. The intelligent investor values integrity and capital allocation skills of management above all else, because they are what will either create or destroy shareholder value. So always look at the management. Look at those two things. Do they have integrity? And are they good at allocating capital? And if the answer is no to either one of those questions, then you should pass over the investment and look for a better pitch. To keep our baseball analogy, Thean Teligent invested understand the manic depressive nature of Mr Market and uses it to his or her advantage. The market has wild swings and moved some vengeance, euphoric, sometimes depressed. We want to take advantage of those swings. That's an advantage that we have the markets depressed. We buy a lot if the markets euphoric we sell a lot. Simple is that the whole key is having a disciplined toe weight on to observe when those things happen. OK, intelligent investors, greedy when others are fearful and fearful when others are greedy, is kind of the same thing. As I just said, what other people are afraid and selling? It's a time for us to be buying, but the people are euphoric and buying. It's a time for us to be selling. Okay, that's the behavior that makes four making money in the stock market. Intelligent investor. Understand. In the short term, the market is a voting machine, but the long term is a weighing machine. In other words, the stock market is efficient over time. But it's inefficient in the short term, giving us opportunities to find misplaced Miss Price bets to find undervalued stocks. That's what we're trying to do. Intelligent investor that knows how to value of business will have a focus portfolio of only 5 to 10 stocks that he or she can easily follow and understand. We don't want to be diversified. In fact, diversification is the enemy. If we know how to value businesses, everyone outperform the market. You wanna have only 5 to 10 really, really good companies and be very, very selective and very, very patient and waiting for that fat pitch to come along and allocate our capital aggressively when one does so. Obviously, that's a difficult thing to do because it takes patience. It takes a good understanding and analysis, but is the method that will build wealth and will help you beat the market is the method that Warren Buffett used to become the richest man in the world. So either you learn this method and you become rich or you don't use this method and you buy a low cost index fun and still become rich just a lot more slowly. Either way is good. Either way gets the job done. Our goal is to not lose money and get an adequate return either way to do it for you. And that's the important understand? Don't need to be a genius. The intelligent investor that does not know how to or is not interested in value business should invest in low cost index public. The Vanguard 5000 or simply by the S and P 500 is a ticker symbol for the S and P 500. Fund S P Y go and you know every month by a few $100 or a few $1000 worth of SP y, and you will build wealth Over time, you won't have toe use anything that you learned in this course it. But if you don't want to. Okay. So I hope you guys learned a lot. I hope this helps you guys build well for yourself and for your families. Over time, I hope that it was understandable and it makes sense to you. And I wish you the best of luck in your investing in Denver's thank you for taking people.