Ep424: Robert Leonard – Value the Qualitative Aspect of a Stock

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community we know that to win in investing you must take risk but to win big you've got to reduce it to join our community for free go to my worst investment ever.com and receive the risk reduction checklist I've created from the lessons I've learned from all my guests and get my weekly email to help you increase your investment return. Also in the community you can get a super special podcast listener discount on my six week valuation masterclass boot camp. In that boot camp, you learn how to value companies like a pro and advance your career in finance, just go to my worst investment ever.com to join the community for free fellow risk takers. This is your worst podcast host Andrew Stotz from a Stotz Academy and I'm here with featured guest Robert Leonard Robert, are you ready to rock? I am ready let's do it. Yeah, I am. I'm gonna introduce you to the audience. So ladies and gentlemen, Robert Leonard is the VP of growth and innovation at the investors Podcast Network, podcast hosts of real estate it one on one and millennial investing, x w two accounting and finance professional as well as a stock and real estate investor. He earned an MBA in accounting and finance a BSBA in finance and economics and is a certified management accountant. Robert, take a minute and fill you further tidbits about your life.

Robert Leonard 01:32
Yeah, absolutely. Every time I get asked about my background, I always go back to when I was four years old, and everybody there the hosts and guests I know they their eyes get big. So why is he going back to when he was four. But I think it's a good story. I think it impacts a lot of my life. And I think it makes me different from other people that you've probably had on the show or as a different host. So go back to when I was four, I entered my first motocross race, I started racing motocross, I raced, I raced ATVs, back then, and so that I ended up doing that for 10 years. And so when I was about 14 years old, I was number two in the world in my age group. And so to put some reference on this or perspective, it's kind of like prospects in major league sports or like the minor leagues, I was like one of the top prospects that was going to go to the next level. And so my whole life growing up, I was relatively good at racing. So I never really had a backup plan or anything, nobody in my family ever went to college. Nobody ever made any investments or anything like that my whole world was racing. And I was about a year and a half out from actually going professional, I had a lot of sponsors that had me on track to go to where I needed to be to become professional. And when I was 14 and a half about, well, maybe almost 15, that dream got ripped away from me. So unfortunately, 2007 2008 economy crashed, money was tight, racing is very expensive, the industry got really hurt. And you know, even more catastrophic, we had a couple of people very close to us either get paralyzed or pass away from riding. And so with the economic impacts that were going on at the time, as well as the risk for injury and even death, my father said, Listen, you're done racing. And so at that point, I was about a freshman in high school, and I had to figure out what I was going to do. I had no plans of going to college, like I said, and this was all I was gonna do, I was gonna be professional athlete racing ATV motocross. And so that leads to today, because I had to figure out what I was going to do. And I did a little bit of self reflection, I was only 14. So I wasn't really great at this. But I did realize, Hey, I'm really good at math. I'm always top of my class in math. And I like money a lot. So I should combine the two and go into finance. And so long story short, I ended up stumbling into a day trading program. And because I was 14, at the time, I thought that this guy was promising overnight riches, it sounded like it was great. It tapped into my emotions. And I wanted to do that. So I ended up getting involved. Thankfully, I didn't spend any money on his courses or invest any money day trading, I ended up realizing really relatively quickly that it was actually not really a plausible investing strategy. But what I am very thankful for is that led me to Warren Buffett. And that really led me to real true value and stock investing, been out to Berkshire Hathaway now and studied Buffett for over a decade now. And so that was my journey from where I was to where I am today.

Andrew Stotz 04:24
And for the listeners out there, I mean, you know, I know that a lot of people's lives are being disrupted right now. And your profession that you thought you were going to do is suddenly closed or is, you know, restricted. But I think that this is a good lesson that you know, you can change that. And you can pivot that and so, you know, Robert story helps to remind us that, you know, good things can come out of crisis, not to say that it wouldn't have been good to be the number one, you know, racer and all of that. But now, let me just ask another question for those people who are always looking for new podcasts, you know, pod Bring value, maybe you can just explain what they get when they listen to your podcast.

Robert Leonard 05:05
Yeah, so we have two segments, I really appreciate you asking we have we have two segments. On Mondays, you get the real estate one on one segment. So on that show, we help new real estate investors get involved in real estate investing, and mostly US based but the strategies that we talked about are applicable across the world. When we get into some of the nitty gritty about financing those deals and that type of stuff, the legalities, probably not going to be applicable necessarily to a foreign country. But the strategies for investing are applicable across the globe. And then on Wednesdays, we have a show called millennial investing that is focused on stock investing, typically around value investing and other real stock investing strategies. We don't really talk much about these, you know, meme stocks and day trading and stuff like that. I mean, we might touch on them as news, but we don't talk about them as a viable investing strategy. So what we're doing there is really trying to help people build and understand real investing strategies.

Andrew Stotz 05:59
Got it? And for people that like the story of what they hear from you and all that, what's the best way for them to follow you? Are you is it Twitter? Or is it LinkedIn? Or what's the best way for them to get your content or engage with you?

Robert Leonard 06:11
Yeah, the best way to contact me personally would be Twitter, or Instagram username is the same, the Robert Leonard, you want to find the shows, just go to the investors podcast.com. And you can find the shows there.

Andrew Stotz 06:22
Fantastic. And we'll have all that in the show notes. Well, now, it's time to show your worst investment ever. And since no one goes into their worst investment thinking it will be tell us a bit about the circumstances leading up to it, then tell us your story.

Robert Leonard 06:36
So we could consider everything I just mentioned about motocross to be the worst investment. And the reason I say that is because a lot of parents see the it takes a lot of money to go racing, especially at the level that I was at. And so a lot of parents see that as a quote unquote, investment. Because if your child is good, and I was good at the time, it could have a huge payoff. And it's not really that any different than buying a stock, you buy a stock and hope for it to appreciate into the future. Same with real estate or any other type of investment. It's kind of the same idea with this, the outlay of cash is the purchase in ideally, in the future, you get a big salary, or a big payout. And it makes up for all the investments that you had. I don't know if I'd say that was the worst investment. But we could consider that when we get into the financial markets. My worst investment is actually probably a pool of investments. And so it's not any one in particular, because they all kind of had the same result all had the same end impact. But what happened was, like I mentioned, I started studying Warren Buffett, but I was very young, I was 14 1516 years old, even in my early college days. There wasn't a lot of other mediums out there, podcasts weren't really popular, YouTube wasn't really super popular, and I'm young. So it's kind of crazy for me to even say that. But I was kind of on my own to learn about this stuff. And so when I was learning about Warren Buffett, I really misunderstood what value investing was, my understanding was that value investing was simply doing a discounted cash flow model. And I felt like I was doing it right, because I have an accounting degree, I have an MBA, etc. I can read financial statements, I know what all the different line items mean, I know what's going on. And so I thought, I'm gonna be great at this, all I have to do is a discounted cash flow model, use the right inputs, look at the financials, and I'll get a valuation if it's undervalued, I'll buy it. And so that's exactly what I did was I did a ton of DCF models and some other multiple models and some other valuation metrics. But for the most part, I just relied on a DCF. And so what ended up happening was, I realized that these stocks were not as undervalued as I thought they were because I over optimized for the growth, or I use the wrong discount rate, or whatever the case was. And so I made a lot of investments based on quantitative factors. And I didn't look at the actual business itself. I didn't look at the industry where the industry is going, I didn't look at where the company's future prospects were going. It was purely, purely quantitative. And so for listeners of the show, who are pretty well versed in finance and investing, you could think of like, Benjamin Graham's cigar, but I guess you could say I was more following that strategy than I was Buffett. But I thought that I was following Warren Buffett, I thought I was going to be the next Warren Buffett. And, you know, truth be told, I found out it's not all just about the numbers. It's not always just about the valuation model, although that is important and should be considered. It's not always the end all be all. And so that led to a pool of bad investments over a few years that all were because of the same strategy and misunderstanding of what Buffett meant.

Andrew Stotz 09:40
So what how would you summarize the lessons that you learned from that?

Robert Leonard 09:44
The lessons that I learned from that is that there is arguably more value, or at least equal value in the qualitative factors of a business than there is in the financials. And so I learned that for a few reasons, one I learned that if there is a true undervaluation purely based on financials, and you can pull up any financial report or statement or whatever, you're looking at data on the internet for this company, and you can find that you're probably wrong, at least in my opinion. That's what I found. If it's only based on the numbers, you're probably wrong. And the reason I say that is because there are hedge funds, super computers, all the software out there, they are arbitraging that all the way, if it's all based on numbers and data, they can analyze way more computers and programs, they can analyze that data way faster, way more accurate, way better than humans can. And so I learned that if it's purely quantitative, then you're probably wrong, and you're probably missing something. The second thing I missed, and it's kind of coupled with that is there's so much value in the qualitative piece, and you have to look at that. And you I had heard of like the blockbuster and Netflix and you know, all these types of situations. But I didn't really give it much consideration, I didn't really think that I was making that same mistake. But now looking back, it was clear as day I was making the same type of an investment. So if I was old enough, I probably would have invested in blockbuster because I didn't see Netflix coming, I didn't see the change that the industry could potentially go in. And so it's really hard to do, especially for somebody like me, because my background is all numbers, numbers, numbers, data about an accounting, you know, those types of things. So for me to think about qualitative factors, and really thinking that there's value in them, it was hard, and it took a long time, and I'm still working at it to this day. But that was a big thing I learned is the management teams where the industry is going where the business is going, are the products good? Do they treat their employees? Well? Do they do ethical business? Are they How are they operating their business? Overall, these types of qualitative things have a lot of value. And that's where I think investors really have their edge. And so those were the biggest lessons that I learned

Andrew Stotz 11:54
great lessons. And I know, you know, I mean, it was many years ago when I started my career as an analyst. But you know, all we have is to go to those books and go to those formulas and think, you know, okay, if I can figure this out, and it's probably one of the biggest, you know, frustrations that I think everybody has, when they start is that Wait a min, I thought just being able to calculate this formula we can get to the and there's a bunch of stuff I wrote down. You know, the first thing in my valuation masterclass, we have different I teach students how to do the forecast, do the valuation, they use my tools, we have many chapters in a report that they're writing on a company. But the first chapter is story. What is the story, and that story has to be built on the future. So a great example of this is in my coffee factory, we had a couple guys and we sell, you know, typical coffee with a big machines that we sell, especially machines, to restaurants, coffee shops, hotels, and then we sell the coffee into it. And these guys came along, they said, Look, the wave of the future is nitrile cold brew coffee. We're like, wow, we don't know how to do that. That's going to require investment, you know, and we were doubtful about the market. And then they then we started to do the numbers and we'd say, Okay, here's the investment. Here's the margin, let's just imagine that the margin overall is 30%. And the margin for this nitrile cold brew would be 40%. So now I started thinking, Okay, so here's how I start to build the story of whether we're going to invest. And that is, what could that percentage be is always going to be 1% of our revenue? Or could we grow it to 10? Or 20? Or 30? And how would that impact our overall gross margin? And then how would that impact the earnings potential of our business? And how much investment will we have to put in it? So like, that's how in a company's strategy, they're putting together the story. And as an analyst, I learned that the value of the story is this critical. There's a couple of other things I wrote down, you know, I think another valuable thing that you know, a person like yourself that's experienced now brings is what I would call portfolio construction. So it's one thing to pick stock, but it's another one to build that portfolio. And the other one is overcoming emotion. Sometimes the market is just going crazy. So we can add value by being steady in our emotion. And then, you know, the other thing that I was thinking about is, you know, at first you started talking about, like, maybe it was wrong inputs into the model. Well, we always put in wrong numbers into the model, we have to kind of adjust that. I wrote a book called nine valuation mistakes and how to avoid them and I teach my students just don't make any of these mistakes. And you've pretty much avoided that common mistake, like too low of a discount rate or something like that. But once you've got those things nailed, now you got to get on to the story. And that brings me to the last thing I was thinking about as I was a lot like you and I started where I was just focused on value, value, value value, and what was my valuation And what I moved my methodology to is something I call fdmr. fundamentals, valuation momentum and risk. So I developed a whole system of quantitative scoring 26,000 companies around the world. And then that allows me based upon the portfolios that I have to just narrow down to say, Where should I be doing my research and looking for the story. And that's how I kind of evolved from just pure value, I want to buy something below its intrinsic value to looking at the whole picture. Those are some of the things I took away anything you would add to that.

Robert Leonard 15:36
Yeah, I think two things I'd add real quick is that you mentioned buying below intrinsic value. And that is, that's still the goal. And I still want to do that. I think everybody wants to do that. But what I realized is that intrinsic value is more than just the financial intrinsic value, there's intrinsic value from all these qualitative things that you have to consider. And the second piece that I realized, and this is probably one of the biggest lessons I learned is you often need to look for a catalyst in a company to realize the discrepancy in the valuation that you have. And so maybe not always, you know, mean reversion is real. And there's some other reasons the y value in price can combine and get back to the same reality. But I realized that in those cases where I made the wrong valuation, from a quantitative perspective, there was absolutely no catalyst on the horizon for these businesses. And that's partially because I didn't understand the qualitative factors, I didn't understand the industry, I didn't understand the business. Whereas you could look and say, Alright, these things are happening in the industry, these are happening with the business, the business is going to launch new products gonna stop new, or old products that are doing poorly, etc, etc, you could say this is going to be a catalyst that is going to cause the price and value to align. And there needs to be something that's going to cause the value that you see and the price that the market is showing to come together. And I believe a catalyst is a big, common factor of that.

Andrew Stotz 16:59
Yeah, excellent. The other thing I was thinking about as you were talking is what I often tell my students is, profit is not valued. And a lot of times we get hooked up on profit. And the best example of this is Amazon, you know, losses for years. If you plug those losses into a model, or you looked at the company, just from a profit perspective, you'd be missing the value they were creating. And so I think, you know, for you, particularly for young people to not confuse, profit and value. And if you do that, in order to construct your valuation, it has to be bringing in all of these different qualitative factors, because profits easy, like you say, you know, there's plenty of guys out there that are that have quantitative models that are scouring the, the stocks in the universe, so, so much, so much to learn. So let me ask you, I want you to go back and think about a young person who's just starting to learn about the stock market, they're interested, you know, and based upon what you learn from this story, and what you continue to learn what one action would you recommend our listeners take to avoid suffering the same fate?

Robert Leonard 18:11
Be sure that you're actually understanding the business, too. And not the financials in even put the financials aside for a second, understand, see if you can even understand the business, make sure it's a business that is within your circle of competency. I'm very strict with that. If it's something that I can't understand, I don't, I don't care if it's undervalued, I don't care if somebody else thinks it's 100 bagger. If I don't understand it, I'm not interested. And so that'll help with understanding the business. And this isn't always possible. And I'm not saying you shouldn't invest if you can't do this, but I like to try and use the product or the service if I can. And that's not always possible, right? Salesforce has been great, maybe you don't work in a situation where you can go and just start using Salesforce, that's fine, I get it. But as much as you can, if you could use their product or service, you can go to their store, if you go to their restaurant, whatever the case is, it's worth the time, it's worth a little bit of money that you're gonna put into seeing how the business works, seeing what their products and services are seeing what the quality is, then you can dive into the numbers and the industry even and go from there. But that's the first thing I would do is try to really, really understand the business and make sure it's within your circle of competency.

Andrew Stotz 19:17
Great lesson. Alright, last question. What's your number one goal for the next 12 months?

Robert Leonard 19:22
My number one goal for the next 12 months is well my goal for 12 months from January 1 to December 31 of this year was to quit my two jobs. And I did that. So I would say that that goal has been met. But for the next 12 months from today on. We're building a pretty cool stock investing software platform at the investors podcast. And I really like it. I'm leading the project and I'm passionate about it. I think it's great. And so obviously I'm biased in saying that but I'm excited about that. I'm really hoping that we can get that to scale and really help A lot of investors, it's helped me a ton. So that's probably the thing that I'm the most excited about.

Andrew Stotz 20:04
Exciting. And Can people access that now at the website? I think, yeah, if you go to

Robert Leonard 20:11
Yeah, if you go to the investors podcast.com and go to tip finance, that is the tool I'm talking about, right now, I will be perfectly radically transparent. The tool is not great, right this second. But we are totally revamping it, we are adding a ton of new features a ton of new tools, really making the user experience a lot better adding a lot more value. So over the next six months, I would see the value of the tool doubling if not tripling, in what it offers to the users. So it's good right now, but we're gonna make it great. And yeah, so I'm really excited about that.

Andrew Stotz 20:44
And good in Roberts terms means go there and use it right now. There's a lot of value in it because you know, most of us can't construct those types of things. So make sure that you check it out. And I'll have a link to that in the show notes. Well, listeners, there you have it another story of loss to keep you winning. My number one goal for the next 12 months is to help you my listeners, reduce risk and increase return in your life. To achieve this. I've created our community at my worst investment ever.com and when you join you'll get that special discount to my six week valuation masterclass boot camp. As we conclude, Robert, I want to thank you again for coming on the show. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Robert Leonard 21:34
I just want to say if anybody if anything I shared resonated with you guys. It's totally fine. If it doesn't I listen to a lot of podcasts. I'm guest just don't resonate with me. But if I did mess, if my message resonated with you, please reach out. I answer every single email I answer every single direct message that I get on social media. I get a lot of them. So it might take me a little while but whatever your question is, whatever you want to chat about, I will absolutely get back to you. So please reach out if there's anything I can do to help and keep listening to great podcasts like this one. And yeah, keep up. Keep up the great work.

Andrew Stotz 22:05
Yeah. Awesome. So you heard it from Robert right there, reach out if you've got a question. I'll have all the links to all of his different social media and other things in the show notes. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.