Brian Feroldi: The Moat Mistake Almost Every Investor Makes

Hello everybody, welcome back to the Wolf Financial Show. My name is Gav Blackburg, CEO at Wolf and your host for today. And joining me for another amazing episode is Brian Foldi, one of my favorite finance commentators on the internet. He's been making content for a long time and he's really, you know, just Brian, you know, you're what you're great at, which is fundamental analysis, deep dives into stocks, really building conviction, and I think that you share it with people in a really unique way. So, I'm excited to get some of that on our pod today. Welcome to the Wolf Show. >> Thanks for having me back, Gav. Awesome to be here. >> Awesome. Let's dive right into things. You have a great portfolio. You've shared it publicly beforehand. You've talked about some of the stocks that you've ridden through high times of conviction and low times of despair, right, as things happen in the market. But really gave you conviction in those was the fundamental analysis and the understanding that, hey, I'm holding a great company here. And it's not as much about the chart as it is about the stock itself. And so with that being said, I want to just dive into, you know, your process, right, from finding the great stocks, building conviction, and holding them for the long term. So let's start off from the top here. Your process, you're discovering a new stock, new potential investment. Where do you start? >> Sure. So first thing that you need to do is hear of the stock idea in the first place. So how do you come up with stock ideas? That has never been easier than it is today. Um there are wonderful tools out there. There are wonderful newsletters out there. I have found that over the last five plus years ago, I used to go on the hunt for stocks. So I would go out and I would search for them in my own personal life. What were my friends talking about? What products or services had I heard heard about? I relied heavily on the Mly Fool for uh for its premium uh recommen recommendation. So rewind the clock five years I was in hunting mode. Now alls I have to do is wait around and stock ideas naturally come my way. If you're involved in the finance world at all, like many of us are, I I can't even tell you how many newsletters I'm subscribed to where people just have their their best ideas come to me on a constant basis um uh for free. Now, like you said, I've been building and honing my portfolio for about 20 years now. So, I know exactly what I'm looking for in investment, and more importantly, I know exactly what I'm not looking for. So that filtering process has become way faster for me today than it was than it was previously before I had my process out um defined. So the place that I get most of my stock ideas from today are from social media and from news from newsletters. >> Okay. So it seems like there's almost the opposite problem which is not how do I find them but how do I filter them. So let's hone in on that part. There's so many names on social media that people are like I'm jumping into this this is up 100%. This is the next great thing. So how do you filter that? >> Yeah. So for for me I always have to get the um on once I get a ticker um the first thing I want to know is what industry is the company in what sector what sector is it in and what is the company business model. I made a decision several years ago that it has to be in an industry in a sector that is understandable to me and it has to be a business model that has some level of recurring revenue to it. If I don't see that a business model has recurring revenue to it, to me that makes its future far harder to predict than businesses that do benefit from from recurring revenue. There's also there's all um sorts of um types of recurring revenue as well. There's subscriptions, uh there's memberships, there's consumables, there's razor and razor blade models. There are hundreds if not thousands of businesses that are publicly traded now that do benefit from recurring revenue. So, I just made the decision personally, why bother with why bother with stocks that don't have recurring revenue when it's so important to my process? So, that's one of the first questions that I ask. And if if the business model is attractive to me because it features recurring revenue, then I take it to the next level of analysis. And if it doesn't, I just say not not my core competency. Next stock. >> What's an example of a stock that was interesting but didn't have recurring revenue, so it wasn't for you? >> So, uh sadly, I'm going to say Nvidia. Uh, Nvidia was a stock that was pitched to me many times um, o over the years by people that I like, know, and trust. And for for many years, I viewed the semiconductor industry as a whole as not for me. Not that it wasn't attractive, not that the margins were good. But the thing that I did not like previously about the semiconductor industry was if you looked back historically, it was gut-wrenchingly cyclical. Again, there was no recurring revenue component to the semiconductor industry. It was boom bust boom bust. During boom times the re revenue and profits took off and inevitably there would be a bust time when everything headed in reverse. I found that those businesses were extremely hard to value and extremely hard to know when I should get in and extremely hard for me as an investor to see the compounding on there. So I said no to companies like in in N in N in N in N in N in N in N in N in N in N in N in N in N in N in N in N in N in N in N in N invidia or Micron um for many years. Now, I will say that I was largely correct about doing so for a long time, but the AI boom has dramatically changed everything. I think that those business models have hugely evolved over the last couple years, and I think a lot of that cyclicality and non-recurring revenue has actually been squeezed out of many of the best performing businesses um out there. So I do I am willing to t give those businesses a second look but that is absolutely a stock that I looked at in the past rejected and and clearly that was to my detriment. Yeah, you mentioned micron. One of the areas which people talk about cyclicality and is it still around is largely memory. Is that an area which you have any exposure to now? >> I don't have any direct exposure to them. I certainly have exposure through ETFs um and and those kinds but Micron in particular is is a fascinating uh case study as as as to what can happen because the management team there has signed these agreements that essentially locks in a sizable portion of their future revenue. If memory serves, I think like 50% of their revenue is now locked into multi-year contracts, which essentially turned one-time cyclical revenue into smooth, highly predictable, and amazing to me, high margin revenue. So, not only has the businesses boomed from from the AI boom, but the quality and predictability of the businesses have gone up, it's actually that second fact that that interests me, not necessarily just the absolute growth. You talked about not only having recurring revenue, but also understanding the business model. Is that understanding it right off the bat? Like this is easy to grasp. Is it, hey, if I did 10 hours of research, I could get it. What's the scale there? >> The there's no extra points in investing for difficulty, right? You can make money uh off of a very simple I have made I've made quite a bit of money off of a a very simple easy to understand business like Chipotle. um where whereas there are companies left out there that like um like ASML again just something that comes to mind. Obviously a fabulous business but boy is that a complicated company to kind of uh to understand. Um, so I I have made the decision that some companies just belong in my too hard pile. And not not to pick on um ASML because it's been a fabulous business in so many ways. And it's not that hard to understand what they do, but biotechs for example, banks, insurance companies, those companies require specialized knowledge to really understand what what what they do. and their financial statements in many ways are like a foreign language to even me who understands accounting deeply. So if a company is way too hard, I I put biotechs, banks, and insurance companies in that and I just say that whole category is just not for me. I actually think it's hilarious that you picked ASML for this category because I recently had an episode with a gentleman named he goes by ticker symbol U on YouTube and he's really like my my guru and my knowledge source when it comes to things tech and he said that ASML he said what they are doing is essentially black magic. So [laughter] it's funny that you picked that one. >> I know that is an N of one company and it's like vital to the the global economy. It was just the first thing that came into mind as like complicated to understand. >> Yeah, it's a great point. What about moat? Where does that fit into it? >> So what is a moat? A moat is a competitive advantage that is inherent to a business model that either that that protects a company's financial statements from the forces of of capitalism. Now there are multiple sources of moes. They've been a topic that have been obviously popularized by Warren Buffett. And there are categories like network effect, switching of cost, lowcost production, brand value, etc. When you're looking and analyzing a business, um, most people focus on the growth rate of the company and use that above all. Now, growth rates can be a fabulous predictor of where a stock is going to go in the short run. I am a firm believer that it's the moat that is the thing that determines the long-term trajectory of a company. But when it comes to moat, what I've learned the hard way is that there are two different things you need to focus on when analyzing a moat. The thing that everybody knows and focuses on is is this a wide moat? Is this a narrow moat? Or does this company not have a moat at all? That is the current state of the moat. What is the current look of the moat? I've actually become convinced that the second thing you need to look at is even more important than the current state of the moat. And that is what is the direction of the company's mode. So, I would way rather invest in a company with no moat that's actively building one as opposed to a company with a really wide moat whose moat is actively shrinking in in place. I think moat trajectory is more important than the absolute stasis that the current state of of the moat. And I think that's something that a lot of investors get wrong when they're looking at when they're using moat as an analysis source. A lot of companies out there have moes or had moes in the past, but those moes are under attack and are rapidly shrinking and the market sniffs that up and takes those companies valuations to to to the woodshed really bids them down. It's very natural for investors that have a value focus such as myself to say this is a wide mo business that's now trading on the cheap which you think is a magical combination for performing well in the long term. But if the direction of those companies moes is narrowing and that and there's nothing that's going to turn that around um I stay far away from from from those businesses. So historically the consumer package good companies have been wonderful places to uh to invest. Hershey's, Proctor and Gamma, uh Pepsi, uh Co Coca-Cola. Um I think you could make a strong argument today that their historic moes, even if they are wide moat companies today, have been dramatically shrinking for for a number of reasons. One is GLP1s, which are generally shrinking the demand for salty snacks and and and and those kind of um those kind of things. But two, more importantly, um advertising. Advertising used to be the moat that those companies had. they could do deals with ABC, NBC, CBS and get their brand message out across uh that that's how you that that way there was a real barrier to getting your message out there. Now with the advent of social media, even small brands can make campaigns on social media go viral and actually pull market share away from those big businesses. So those are examples of companies that probably if you look look like they have a wide moat, but since their moes are shrinking or I believe they're shrinking, I'm I'm staying away. >> What about on the other side? What's an example of some companies that are building moes right now that you're bullish on? >> Well, there's a lot of AI companies out there that are actively uh bu building out um building out moes that didn't used to have one. We talked about Micron uh previously. I think what they've done with their contracts that they've signed is a great example of building of a moat getting wider uh over time. So, Micron used to be there's like what three companies that have the size and scale to make memory chips at the scale that that Micron is. Previously, that didn't that didn't matter. they were highly cyclical um industries. So the the the market share between them was was very fluid. Now that the management teams are actually going out and creating these contracts that buy that that pull in buyers for multi-year uh multi-year periods, suddenly you're creating switching costs and you're making the revenue far more predictable than than you had um in in the past. Another company that comes to mind would be like on on running. Uh their tick goes on on they are a uh a sneaker a sneaker company that has a a special um if if you know what I'm talking about that their sneakers are more comfortable and and and very popular. Yep. So that is a company that is actively taking market share away from Nike and they're doing so through through branding and distribution. That is not a company that historically has had a wide moat, but since they're building out their distribution, they're getting their marketing uh up and running and they're stealing um a mind share and they're doing a fabulous job. I think you can make an argument that they don't have much of a moat, but they're actively building one. And I think that's one reason why the stock has performed well. >> Well said. Let's take it over to the actual financial statements. This is where, you know, you truly are a wizard. You've walked through them with people for probably a decade plus. What are you actually looking for when you go to a financial statement? >> So, um, what I'm looking for is highly dependent on what phase of the business growth cycle a company is in. There are some companies that are in the startup phase that are actively losing huge amounts of money. They're purposely overspending in an effort to build out their their business model over time. Uh, other companies like an example of that would be like SpaceX. SpaceX is losing gobs of money uh right now, but they're in even though they're what $ 1.5 trillion dollar company, they're in the startup phase. So, you obviously when you're looking at their financial statements, you have to look through that lens when analyzing are they doing a good job uh or not. Take that a company on the other side would be like Apple. Apple is very clearly in the capital return phase. They're their their financial statements are fully built out. their margins are fully optimized and they're act they've been returning capital to shareholders for 10 plus years now through the dividend um and the buyback. So the first question you need to ask when you're looking at financial statements is what phase of the business growth cycle is the company in and what is the thing that management is is optimizing the business for? Elon is optimizing SpaceX for topline revenue growth. That is the metric that you should look at when analyzing how are they doing as a business. Revenue uh grow gross margin and then and then the burn rate. Those are the key metrics there. Take a company like Apple. Apple would love to grow its topline but that is not the absolute focus of the business. The focus of the business is maximize margins, maximize return on invested capital and maximize capital return program in order to power returns for shareholders. So when you're analyzing Apple's business, you need to look at things like return on invested capital. You need to look at what gross operating and net margin is. Things like the company's tax rate come into come into play and and the company's balance sheet is being used to buy back stock or pay dividends. So the lens that you look through financial statements depends highly on what management is trying to do. >> What's a stock that you think might surprise people, but you would say has, you know, a flawless balance sheet or a flawless financial statement when you look at it in perspective of what you just said? >> Oh, um, Meta Meta has one of the best balance sheets, um, on earth, or at least it did um, at least it has, uh, historically. It's had extremely clean financial statements throughout its life. I believe even when Meta came public way back in 2012, it was profitable. Um, how many companies that come public nowadays are actually showing profits. In addition to that, Meta's margins have been fantastic basically along the entire way and they've done so without any leverage whatsoever. They've always had an extremely clean, easy to understand um, balance sheet. So even though their size is enormous, even though the complexity of the business is is fairly complex given all the uh the components that they have to it, they have been a company that might sound complicated to analyze, but I have always found to be quite easy. >> What's some of the traps that people fall into when reading financial statements? >> Oh, traps. Oh, there's so many that you can um that you can do. Uh I would say the the most common trap that that I see um is just focusing on the growth rate. people when when you're looking at um when most people are looking at quote unquote financial statements, what they're really doing is looking at the headline numbers. The headline numbers are what's the revenue growth rate and what's the what's the earnings per share? And specifically, did the earnings per share beat or miss estimates and and and by how by how much? Um I would say that um revenue is a cleaner number and one that you should we should focus on. The revenue growth rate really matters for basically every business. Earnings per share is a number that is so easy to manipulate and there are so many pitfalls that naturally exist in financial statements that overemphasizing earnings per share is a very common mistake that people make because we've all taught when you get into uh investing what's like the one valuation metric that gets hammered in people's heads price toearnings ratio right is the thing that is so commonly said what is the company's price to earnings ratio price earnings ratio made a ton of sense when GAP accountant GA gap accounting was created a hundred years ago, right? When when companies were industrial uh businesses using using the price to earnings ratio made a ton of sense. More modern businesses that have software or asset light or heavily used stockbased compensation, the price toearnings ratio has become a far less useful metric than it has been than it has been um historically. So I would say the biggest mistake I make I see people making with venture samples is overemphasizing the importance of earnings and not understanding the components that go into making those earnings. >> It's a great point. How much exposure do you have right now in your own portfolio to the AI trade? We've mentioned it a couple times here as one of the newer areas that is really picking up steam. >> Uh it depends on if you mean direct exposure or indirect um exposure and it depends on also what you mean by the AI trade. For example, um Tesla is one of my largest holdings. Is Tesla an AI company? >> I think it's humanoid or robot. [laughter] >> Yeah, right. Tesla is more of an auto business with an AI call option uh built into it. How about Google? Is Google an AI company or is it an advertising company? Is Microsoft an AI company or is there is it a enterprise software uh company? So I think if you say how much AI exposure you have you're mostly talking about the AI pure plays out there which is largely the AI providers like um Nvidia like Micron uh like sand like SanDisk. So the direct the direct companies out there I am underexposed directly to those names because of the the factor that I mentioned before. Many of the companies that have really boomed because of the AI super cycle um had business models that I was unattracted to prior to the boom. In fact, for many years now, me like many other people have thought like well what goes up will eventually come down. The AI trade will eventually unwind and many of these businesses um uh will get hurt. So I would say I am underexposed to the components that are benefiting from the AI boom right now. Having said that, I do have exposure to those companies through ETFs, just not directly through individual stock picks. >> Got it. I want to talk about your valuation approach because it sounds like, you know, sometimes you could be looking at a stock and people think that that's a pricey stock, but you potentially saying, "Hey, it fits all my molds. It's got recurring revenue, right? I am going to purchase this." I'm curious. You talk valuation that I'd love to hear about some stocks where it was, "Hey, everyone looked at this stock. It just had a huge runup, but I was bullish on it and I still bought it anyways." or maybe vice versa. >> Sure. Uh first off, valuation is one of the trickiest things about investing. Full stop. Period. There's no always that applies to to valuation. It's always well it depends is the real answer to to to to valuation as as a general statement. And boy is this um a general statement. the higher quality the business is and the higher the growth rate, the less I emphasize valuation. And the lower quality the business and the lower the growth rate, the more I emphasize valuation. So, one of my best purchases of all time was back in 2011 when I made my first purchase of Amazon. Now, if you looked at Amazon through a classic valuation lens, even back in 2011, there was no metric that you could look at that said this stock is cheap. None. Like I think when I bought it, the PE ratio of Amazon was like 500, right? Or or some insane number like like that. However, and and the market cap I think was like 50 billion or some some huge number compared to the the underlying financial statements um of of the business. Now, at the time, I said, "The quality of this business is so high and the growth potential of this business is so high that I'm going to deemphasize valuation. I'm going to kind of hold my nose with valuation and buy anyway." And I bought the company essentially at an all-time high. Looking back, that was one of the best purchases I've ever made because the quality of the company and the growth rate of the company has persisted what, 15 plus years later. Uh you could say the same thing about some other quality purchases that I made at all-time highs. I bought Visa at an all-time high. I bought Mastercard um at at an all-time uh high. Um so company so several times the best purchases that I made were when companies were trading at an all-time high did not look optically cheap, but their valuation was very high and their growth rate was high and very durable. And each of those purchases proved to be a market beating uh uh a purchase. So when it comes to when it comes to valuation, the higher the growth, the higher the quality, the less you should emphasize it. And the lower the growth and the lower the quality, the more you should emphasize it. >> Do you feel like a lot of the names that actually end up in your portfolio are already decently established? They're never too small in terms of, you know, market cap compared to the rest of the general market. >> Yeah, I would say that if you look at the average market cap of my port portfolio, it's in the hundreds of billions of dollars at this point. However, when I purchased them, um, like if you look at my top 10 holdings, the newest one to me I bought nine years ago. That was the newest one. Like many of the stocks I I purchased 10 plus years ago. In fact, I still own my my my first um Google Google purchase was March of 2009. So that was what se we're on year 17 of me holding um uh Google stock. So, if you look at my largest um holdings, I when I bought them, they weren't the biggest companies in the world, but they've grown to become kind of the biggest companies of the world. Um, however, I will say, go ahead. I I recently saw a chart um that was by CO2 investors. It was presented at the All-In Summit, uh the All-In liquidity summit that that kind of broke my brain. If anybody knows what I'm talking about here, what they did was an analysis on what is the likelihood that a company will 10x at different size scales. So they did one billion1 billion dollar uh stunk. What's what's the likelihood of it 10xing? I don't remember the exact number, but it was something around like 8%. Like 8% of $1 billion companies become 10 billion dollar companies. Take the $10 billion companies. What percent of them become hundred billion dollar companies? It was somewhere around 9% 10%. So you have a one in 10 chance of that. Then it said, "What is the odds of a $100 billion company becoming a trillion dollar company?" You know what the answer was? 31%. One in three hundred billion dollar companies becomes a trillion dollar company. So that kind of broke my brain because I was like, you always I've always associated smaller with better growth potential and smaller with higher likelihood of multibagging. And what their studies showed was basically the inverse of that. The if a company is worth a hundred billion dollars, it's got something going right about the business that's going to make it worth increase the chance of being worth $1 trillion in time. So that that caused me to say maybe I should focus on the bigger mega caps and which ones do I think could get bigger as opposed to always focusing on smaller and midcaps and asking which ones can can grow to say 100 billion. That is interesting because there's only, you know, sub what 20 companies all time that have really hit a trillion. >> Yep. >> And so it's it's basically saying, I guess if if if you get to 100 billion, you're pretty likely to make it there. And not many companies have made it to 100 billion is basically what they're saying. >> Yeah. And if you think about it, what what characteristic does the business have to have to get to 100 billion? 100 billion is a unbelievably massive unbelievably massive number but clearly you have an economic engine in place that the market has valued and rewarded you to a hundred billion dollar valuation. So um it's almost like the businesses hit these thresholds and if they prove that they can get to a certain threshold then the likelihood of them getting to the next threshold increases. And remember this was just the percentage chances. Just because you're worth a h 100red billion doesn't mean you're going to get to a trillion. But the fact that you could get to 100 billion and your chances of 10xing from there increases rather than decreases kind of broke my brain. >> Yeah. Very interesting. What's the smallest company by market cap in your portfolio? >> O I would have to look that up. I went through a cleansing period about two years ago. I used to own about 70 stocks. Um, and from a uh quality of life perspective, that was too many for me to manage and keep track of. So, I went through a culling period. And I've learned this lesson the hard way. When you're culling your portfolio, it's very natural to cull your winners and to and to leave your losers that that are down. Um, I've learned the hard way. Uh, thanks to lessons of people like David Gardner, you want to do the exact opposite strategy. So, you want to callull your losers. You want to pull back on your losers and you want to feed your winners. So because of because I went through that process, I went through a period when I kind of called the losers in my portfolio and the losers were the ones that I bought went down substantially. So their market cap kind of shrank. So I kind of pulled those those uh stocks out of there. But if I was to look at my portfolio, it looks like um uh I can tell you the exact answer. the the smallest company in my portfolio is um EPAM Systems which has a five billion dollar market cap. >> Okay, interesting little spidcap inside there. Haven't heard of them. >> It hasn't been a good run for them. [laughter] >> Okay, got it. Got it. Got it. Um okay, how do you think about risk? >> Well, that's a great question because risk can mean different things to different people. Um, so the when I define risk, I like Warren Buffett's definition of risk best. He said re risk is the reasoned probability of earning an inadequate return. So inadequate return could mean you lose money, right? That's a bad return. Or it could mean that you underperform what what you could have done with the that um that that otherwise. So that's what risk means to me. Risk means the reason probability that I earn a poor return. So the components that go into making something risky or not. There's two components. One is the attributes the intrinsic risk of a specific business. So that could be things like uh what are the risks what are the chances that the business gets disrupted? Uh what are the risks that there's fraud at the business? What are the what are the what are the chances that this company is dependent on some outside force for its success? For example, oil companies are dependent on the price of oil, which they don't control. Gold companies are dependent on the price of gold. Uh, right? So, there's some outside forces. So, those are intrinsic characteristics to the business that increase or decrease their risk profile. That's one thing. The second risk is me, the risk of me doing the wrong thing. So that could be overpaying for a stock that doesn't deserve to be overpaid for or selling that stock at the wrong time. So you might you might find a great business and you buy it at the wrong time and sell at the wrong time and lose money on it. Like there are people out there that have lost money investing in Nvidia, the best performing stock of the last, you know, 30 years. But that's not because they they bought the wrong company or the business was too risky. it's because the the they themselves made the stock riskier by not matching up their holding period with the holding period that needed to be. So that's the way that I think about risk. And in generally I I try and minimize both risks. I try and buy companies that have low business risk and I try and buy and hold for very long periods of time to minimize my risk. But risk is just a part of investing. >> Yeah, it's a good point as well on winners and losers and calling in those pieces. I do have a question because you mentioned you've held Google for 17 years during that time period obviously you haven't necessarily sold it but have you added to it and how do you think about adding to positions that or you know it's increasing cost basis but you do still see opportunity? >> Yeah, I I'm I'm happy to buy more of companies that have done well in my portfolio. Um I've added to Google multiple multiple times over the years. So my first buy is usually just an entry- level position and then I continue buying for there. But I've become a big believer that I don't want to force certain allocations in my portfolio. For example, some investors go out there and say I like Micron. I want a 7% position in Micron or or or whatever whatever it is. And they kind of force that position in by putting the capital in. My investing style is to make more bets with smaller amounts of capital and then let the companies themselves earn a higher position in my portfolio through their own execution and and performance. So again, if you look at my top 10 holdings today, in every single case, I bought a company, it performed extremely well, it grew and it and it earned its spot in my portfolio, which by the way is exactly how indexes work, right? indexes buy dozens or hundreds or thousands of stocks and then the biggest components in them become the ones that go up the much so they earn their position earn a higher position um in your portfolio. That's the way that I construct my portfolio as opposed to forcing them in there. >> Does it ever feel rough? You're like, I'm up 800% on Google and I'm gonna add here and now my cost basis is, you know, going up by 20%. >> Boy, is that psychologically hard to do, isn't it? Uh it's it's so funny. What what's even what's even harder to do psychologically is if you buy a stock, you lose money on it, and then you sell it, and then you reby that stock later. Boy, does that take a lot of mental fortitude to be like, "Well, I was wrong with my sell decision. Let me go back and and do it." But yeah, uh I feel a heck of a lot better adding to a stock that I've already made money that I've already made money on. Um as opposed to rebying a stock that I've lost money on. And again, that works because it's psychologically backwards. There are so many things about investing that good investing is the exact opposite of what you would innately assume that it would be. So, when I first started investing, I absolutely would have bought stocks and then bought more of my losers and then sold my winners, which is exactly the wrong thing to do. You should buy more of your winners and sell sell your sell your losers. >> Yeah. And you you just touched on position sizing a little bit. entry position building over time, not necessarily needing to stay with a specific percentage, but any additional thoughts in terms of position sizing in general, and then we have talked about when to buy a lot, and we've talked a little bit about when to sell in terms of losers, but what about when to take profit or when to sell on something that's a winner? >> Yep. So, buying is hard. Knowing when to buy, that takes that takes time. But buying is infinitely easier than selling. Selling is so much harder. um that than buying because there are there are numerous reasons to sell. So uh if you're listening to this, I don't care if you're a swing trader, momentum trader, fundamental investor, buy, like no matter what it is, this the exercise I'm about to explain is really helpful. Write down the reasons that you would sell a stock. Like literally, write them down. I will sell a stock if fill-in- thelank happens. It's so mentally clarifying to have your rules for selling written down because then if you're ever in the thing of should I or shouldn't I, you just go to your rules and say did I am I tripping any of my rules? Well, I'm going to follow my own particular rules that I have. That's the exact same thing that I do before buying. I say I'm going to buy a stock if fill in the blank and then if it meets my criteria, I know that that stock is a buy for me. And same thing in reverse for a sell. So for me I sell for a few main reasons. First most important reason to sell I was wrong. I bought a stock for ABC reasons. ABC reasons did not happen either through misfortune or the company's poor execution or management ineptitude. The stock got punished and I was wrong. I was wrong about that business. Give you an example. uh seven, eight years ago, um I was a big investor in GrubHub. My thesis at the time was GrubHub was the market leader in restaurant delivery and I thought, well, the market leader is going to have network effects working for it and they're going to take the majority share and they were profitable at the time. That was my thesis for for GrubHub. Then along came Door Dash, which blew them out of the water. just absolutely blew them out of the water and their financials showed revenue was declining, market costs were increasing, they were profitable, then they became unprofitable and they just got and I think they eventually got acquired by I don't remember who they got acquired by, but my my thesis was GrubHub was the market leader. The numbers showed no, they're not. And and my thesis and my and I got um I lost money on that. So I was like, okay, I was wrong about GrubHub. I don't mind selling it. That's the most common reason that that I sell. Um, other reasons that I sell is um emotional reasons and good good emotional reasons to sell are I'm losing sleep at night thinking about this stock. If if you're losing sleep because of a position, that's a really good emotional reason to to to sell the stock. Or too much of my net worth is in this is in this one company. It's an uncomfortably large position for me. that that's a good reason um to sell or if you have a lot of positions like I did, I don't want to follow that company anymore. The the the time investment to me to follow that company's earnings and track how it's doing isn't worth it to me. So, I I've sold companies because I'm not interested in following that company um anymore. And then the last reason is just valuation. If a if if a company is extraordinarily premium valued and I don't think the upside potential of that business warrants the risk that you're taking on for valuation, um I don't mind selling. >> Well said. Just a few rapid fire questions here before we get to the end. Uh right now, first off, what is the last stock that you purchased and when? >> The last stock that I purchased, I I have been very hands-off with the market for um uh for quite some time. So, I think uh I think the last stock that I purchased was Microsoft. >> Okay. What year was that? >> 2024. >> Okay. Got it. Was that a new addition or an ad? >> New addition. >> Okay. Very interesting. So, haven't added anything in 2025 or 2026. >> Yep. I've been I've been very um I've been watching the AI thing take off, which has been the driving force of the market. And as I said at the start of this, that hasn't been a thesis that I've been supportive of because I didn't like the business model behind that. But my portfolio is like, you know, 90 plus% allocated to to individual stocks. So, I've been more I'm going to let I'm going to keep what I what I have as opposed to adding to it. >> What do you do with additional cash that comes in? >> Uh I don't mind building up my cash position. >> Okay. So, is it in a two-year cash position that's kind of building? >> It it it my my cash position has grown. Right now, I'm at about 25% cash position, which is very high for me. >> Do you put that cash in a money market accounts or other places? In the meantime, >> I put in an ETF called SGV. SGOV. It's got a slightly higher interest rate than than what I would pay in my brokerage account. And there's some tax benefits to doing so, but effectively it's cash. >> Yeah, absolutely. I'm familiar with ESG. I've utilized it for something similar as well. I am playing around right now. They're starting to offer I mean it's not FDIC insured as much, but Robin Hood has USDG, which is like their token now, and they offer 7% on it. Acts as a stable token. Um, so I've >> 7%. >> Yeah, it's 7%. my spidey senses go off as in what's the downside to that but >> downside's not FDAC insured. >> Yeah, there [laughter] you go. >> Pieces, >> which doesn't matter until it does. >> Yes. So, you of course have to you have to be aware of this because that's why I'm not going and throwing my whole portfolio uh or all my cash, you know, into something like that. But absolutely when it's double, they're subsidizing the rate, I think, because it's a newer product. >> Um would probably be the correct answer there as well. Okay, very interesting. If you had to summarize your investing mentality and thesis into one sentence or one paragraph, what would it be? >> Buy great companies and hold them until they're no longer great. >> Very nice. Very fun. Very interesting. Okay. And then what's your favorite investing story? Like something that just stood out to you or made a mark on you that's really just stuck with you for the long term. >> Oh boy. Um the one that comes to mind is something that happened with the Mly Fool when they were on the TV show The View. Are you familiar with this story? >> Uh, I'm familiar with Molly Fool and The View. Not familiar with the story though. >> Okay. So, in 1997ish, 19 something like that. Um, the Mly Fool brothers, David and Tom Gardner, went on The View and there was a new host on The View and they wanted to help that host get invested in the stock market and they went on and they learned a little about the host and they suggested to the host that she should buy Starbucks. So, she bought Starbucks. She allocated whatever a couple thousand bucks to Starbucks and then they brought the Mly Fool on six weeks later and six weeks later Starbucks stock had fallen 25%. And when the Mly Fool revealed that they were booed by The View and they were like I think we were the first people ever to be booed on on The View and they were never invited back again. Now, if you know what happened to Starbucks since 1997, you would know that that that multi,000 investment has paid off tremendously well. Like, I I don't even know how many baggers Starbucks stock is since 1997. It's probably a 50 bagger or more. So, huge outperformance. It's been a fabulous business, great brand. This was something that the host loved. And yet because it was judged over the inappropriate time period 6 weeks, uh it was viewed as a dud investment. So I love that story because it's about finding a great business that you know and love that's easy to understand that matches it. It turned out to be a phenomenal successment success, but when judged over an inappropriate time period, it looked like a failure. >> Yeah, it definitely did take some time. you know, they probably bought it around$2 to4 dollars and, you know, it fell back to there even after the OA crisis, but then now it's trading at over 100. >> There you go. So, 50 bagger, not including dividends or any or any reinvestments along the way. And Starbucks has been become a fabulous uh div dividend uh payer. But that that just shows to me if you're going to be investing in the stock market, you need to judge your results over the appropriate time period. And unfortunately, the appropriate time period for stocks is years, not days. Yeah, well said. This has been great. I've really enjoyed it. Brian, any final lesson or final words that you want to leave people with as we wrap up? Uh, >> I would just say my my takeaway for everything is I'm a huge fan of education. The the first start to doing anything well is always to educate yourself. We've ne it's never been easier to do so. Uh, podcasts, YouTube, blogs, AI, it's like the easiest thing in the it's never been easier than it is today to to educate yourself. So no matter what your investing goal is, always start with education. That pays the best returns. >> Yeah. And a great place to educate yourself, someone's watching, is on Brian's channels, Brian Feraldi. You put out a ton of great content both on Twitter YouTube LinkedIn other places. And there's also a new uh a new platform, Stock Simplifier, that people should check out. That's live as well already right? >> Yes. Yes. Yeah, it is. It's a it's a it's the research tool that I wish existed when I first started investing. But if you're interested in fundamental um fundamental analysis, it's a product that me and my team have built to make that process easier. >> There you go. I encourage people Oh, and then my final question, sorry, I know I already did wrap-up thoughts, but do you place or do you pay attention at all to any technical analysis? >> Um, so this might surprise you. For many years, I was anti-technical analysis, like completely against it. I thought it was voodoo. Um, I actually read a book a few years ago called The Emotionally Intelligent Investor. I don't know if you're familiar with that, but that was the first book that started to change my mind about it. And what that book told me about technical analysis is technical analysis is how you read the mood of the market about a stock. So, it's almost like te it's almost like measuring the sentiment about a stock at any given period of time. I previously thought that technical analysis was largely voodoo. I since I now believe it's actually a useful tool for figuring out what is the mood of the market surrounding a company and it can be used to to to assess that. So, I use technical analysis to measure the the um the market's um overall mood about a stock and I think it can be useful with simple 50 and 200 day moving averages to figure out if if money is moving into a stock or money is moving um out of a stock. So, I I I I now see the value of it. It's not a major part of my investing process, but I am no longer against it like I once was. >> Well said. Yeah, I actually do use it pretty similarly. All right, everybody. That's going to do it for the episode. If you have questions, thoughts, please drop them in the comments below. Do my best to answer them. Give the video a like. Share it out with your friends. That's going to do it for today. Thanks, Brian. We'll see you on the next one. Thanks for watching today's video. If you enjoyed it, go check out the Wool Financial Newsletter. Did you know that we make a ton of content? We host 60 plus hours of Twitter spaces and live streams every single week. We're posting on the timeline over and over and over. We put up YouTube videos and one of our prime gems is our newsletter. And it's free into your inbox multiple times a week. We mix it up. We give stock picks, market headlines, research info. It's a great way for you to stay in touch with the stock market and your portfolio without having to spend 8 hours a day staring at your brokerage screen. So again, link is below. 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