Ep610: Conor Riley – Don’t Throw Good Money After Bad Money

Andrew Stotz 0:02
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 risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives fellow risk takers, this is your worst podcast host Andrew Stotz, from A. Stotz Academy, and I'm here with feature guests, Connor Riley, Connor, are you ready to join the mission?

Conor Riley 0:32
I absolutely am. So happy to be here. And thanks for having

Andrew Stotz 0:35
me. I am looking forward to hearing your story. But before I do, let me just introduce you to the audience. Connor Riley is a global executive who has worked in investment banking, private equity, and consumer products all of his career. And Connor, why don't you take a minute and fill in a little bit about the unique value that you bring to this wonderful world?

Conor Riley 0:57
Well, I'd say that I bring that unique perspective of a fund manager, private equity guy, and entrepreneur with, you know, that is all well and good. But it's married with years and years of operational experience. So I like to think of myself as not only somebody that can walk through a spreadsheet, but also someone that can pack a box and make a buck.

Andrew Stotz 1:20
Interesting, you know, we were before we turned on the recorder, we were talking about, you know, university times, I was thinking about when I was looking at your story a little bit. I was thinking, I wonder what would have happened with me if I had stayed in Los Angeles, continued, you know, studying finance, but also working at Pepsi. And maybe I would have ended up being a business partner with you. Maybe you can just tell tell a little bit of the story, your backstory about you know, how you started and some of that before we get into your worst investment ever?

Conor Riley 1:53
Yeah, absolutely. So I had the the, I always had the desire to build something big, I wanted to, you know, grow wealth, I wanted to create wealth. And I didn't quite know how to do that. And I had an idea for a company when I was 20. And was fortunate enough to have friends that that that had parents that were part of the community in the in the venture world. So when I didn't know anything, and I didn't have a penny to my name, I kind of talked to my friends, hey, I got this idea about doing kind of a web based portal that we can sell some marketing stuff on. You know, I don't know if that's really something that we that we can make money in. But I'm pretty excited about the idea. They said, Well, I don't know anything about that. But talk to my dad, talk to my mom. And you know, when it came time to kind of pass the hat around the community. Suddenly, I had general partners from all these top five venture funds that were committing a few bucks to my wackadoo startup. And before you know it, I was off to the races at the startup going how to staff. Here I am 1920 years old managing a staff of 27 in Modesto, California, selling event space on some portal, the business model was to basically curate a really defined web experience. And this is in the days before Google, there was no accessible to any kind of a website. I mean, the business was so flawed from the beginning. But we did events to kind of drive traffic to the website. And fortunately, those events we were able to monetize. So kind of by accident, we were able to have a successful company, which I was able to sell, and in selling that was able to generate a pretty decent return when the bubble was bursting all around me and some of the other tech companies weren't doing so hot. So that was that was a very interesting time. And then after that exit, everybody said, Wow, you've raised venture money before and I was like, Well, I kind of did. I mean, I just talked to some people. So I went into capital consulting and all of like, 23 not knowing anything about what I was doing. From there jumped into a venture fund that was doing early stage tech investing. And then from there, I really found my true passion, which was private equity investing in manufacturing and transportation, which was so great, because if the laws of physics didn't change, we were always in business. It was a great business to be in. And then so yeah, that kind of put me on my path into consumer products and it's been a pretty fun ride.

Andrew Stotz 4:24
And how would you describe your typical I don't know day or your typical week of what you're doing now?

Conor Riley 4:29
Well, right now, I have kind of leveraged that financing background and I've in consumer product experience and now I run a beauty company called luXy. luXy makes premium handmade makeup brushes. So I my day is calling Norstrom calling Bloomingdale's talk and makeup talking to influencers. I spend a lot of time talking about eyeshadow. And then when I'm not doing that or designing products, then it's sort of your run of the mill business operations, his payroll covered his office covered, what, you know, what's the what's the growth strategy? What's the plan forward, there's a lot of interesting transactions in the beauty space that we're exploring right now. So that's been kind of fun. So like, as a deal guy, I'm able to combine both the dealmaking side with kind of this operational background, and it's really a lot of fun. So right now, I'm having a good time as CEO of a consumer products company on this premium brush company, luXy, which is just it's, I don't know, it's a dream come true.

Andrew Stotz 5:32
Interesting. And here I am sitting in Bangkok, Thailand, where we're slowly recovering, because our economy is based upon tourism, we had 40 million tourists in 2019. And you know that that number completely collapsed, and it's slowly coming back. But it's a hard slog here, I'm just curious, whatever can business conditions like, there, you know, for your business and other businesses that you're interacting with, just so that the audience can also just kind of understand what's happening in that part of the world?

Conor Riley 6:03
Yeah, it's, it's a really tough grind. I mean, Bangkok is one of the beauty hubs of Southeast Asia, we have offices in Singapore, which is another big hub. So the the way that a lot of beauty sales get made in Southeast Asia is beauty travel. So people travel, they pick up stuff that might not be available in their home country, and kind of build, you know, load up the shopping bags and then go home. That's also true in Latin America, places in Europe. So like travel, retail has really taken a big hit for us. And brick and mortar retail here in the US is starting to come back. But it's it's it's been really topsy turvy. And one of the lasting impacts of that is that retailers don't want to carry as much inventory. So they're pushing inventory back to us, which in turn makes our working capital expenses go way up, because we have to carry more inventory. Prior to the pandemic, we were able to buy, ship and sell all of our inventory in about four and a half months. Now it's about nine and a half months. So your working capital numbers kind of double there. And while that's going on the cost of businesses going up wages salary, just general inflationary pressures. So it's a really, it's a really tough time in the consumer product space. And, you know, the big discussion is we want to start pushing some of this cost back onto the consumers, which is kind of what we need to do to maintain margin. But then how do you work with your retailers to do that is your price point such that you're established and can do that? And will that ultimately damage market share and sales. So it's, it's, it's really a tough place to be as we navigate through this. And unfortunately, I don't see it getting any better anytime soon.

Andrew Stotz 7:47
Yeah, and for the listeners out there, when you think about calculating the value of a company, you're talking about, really two things. First, you're talking about the profitability of that company. In in the technical sense, it could be called net operating profit after tax. And the second thing is, what level of investment is needed with this company. And investment could be broken down into two parts, the capex spending that a company needs to expand its operations. And the second one is the net working capital demands on the company. And that net working capital demand has gone up for every company, including my business here, one of my business here is a coffee business and our inventory levels, it's very tough, you know that, to manage that during the crisis. And when you have a higher level of net working capital, it means the value of your business is lower. And so it is very critical, not only from an operational perspective, but from the value of a business perspective, work that out. So for the listeners out there that are sitting on a lot of inventory or know about that, you know, it is critical to try to figure out how to solve that problem, or else you really are penalizing the value of your business.

Conor Riley 9:00
Yeah, that's a really good point.

Andrew Stotz 9:03
So now it's time to share 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 and then tell us your story.

Conor Riley 9:13
Okay, so I have had the pleasure of having a few big liquidity events in my life. And one liquidity event just happened to occur in 2005 2006 ish timeframe. And it was it was tied to exiting some some investments that we had in the in the Equity Fund, and the benefit of that meant I had a lot of money in the bank account, and not really being classically trained. I mean, people think, Oh, you're in private equity. You must know everything I know about investing in companies. Okay. I don't know anything about the stock market. I don't know anything about how sort of macro big grinding companies work. So I did what anybody, kind of, in my opinion Session does, which has spent a lot of time at the gym and working out, getting you know, getting those four hour gym sessions in building those gym buddy relationships, hey, let's get in there at three, today's bench tomorrow shoulders, the next day is back. Didn't you know and we're just sitting in there lifting weights and just kind of be messing with each other. But these are pretty smart guys that I'm in there with. So one of the guys starts mentioning about dividend payments starts talking about what good stocks pay good dividends and kind of where where you can maximize your your income in a very risk adverse way. And of course, I'm like listening to this between reps thinking this is great. And this guy's nice. I've known him forever. I mean, I trust this guy with you know, 250 pounds over my noggin to make sure I don't you know, get banged up in the gym is advice must be pretty good. I did 00 research beyond what the gym guy told me other than some in depth parking lot conversation about Wow, you sure? You know, how has it been performing historic, I kind of knew the questions to ask, because I had the context of a private equity investment, but never really thought about it. So the name of the stock my worst investment ever Washington Mutual. So I'm buying Washington Mutual, in 2006 2007. And I mean, I am buying it like it's going out of business, which later I really was buying it like it was going out of business. But it was it was it was such a fervor I wanted it was the only sure thing I knew to be in my portfolio. It created cash for me it created dividends. For me, I felt like it was very much not something that was gonna get get busted up. So I'm flying around doing some deals, I'll never forget where I was when Lehman crashed. I was in London, England, it's 2008. And now the markets are buckling. And during this time, all of the financial institutions were under the gun and no government was looking at them. AIG came under the gun, a bit Goldman all of the big institutions were were were sort of waiting in line, if you will, to get bailed out, the stock for Washington Mutual is down. And I think to myself, this is a great opportunity. I'm gonna come in to this thing, I'm gonna buy all this stock, that's now at half of what I bought it for before, have an even bigger position in this thing and laugh all the way to the bank because the government's coming in, they're gonna bail it out just like they did some of these other institutions. So I do that a call the broker like I want to buy more Washington Mutual. Cotter, you're crazy. Don't you know, what are you doing? We gotta get you out of this. What are you? So I'm buying I'm probably the only guy out there in the market. That's, that's buying. The stock keeps dropping, keeps dropping, what am I doing, I'm buying the whole time. It's going down. I'm buying. I'm looking just calculating these dividend payments in my head, thinking of how great this investment is going to be. Finally, I get word. Now, I don't know how long the timeframe was it felt like an eternity. I get word. The business is shutting down that Washington Mutual is done. They're down for the count. The government is not going to come right again. It's it's in receivership now and filing Chapter 11 and all the bad stuff. Everything awful that I thought could happen is happening. And my entire investment is worth nothing. And it was basically my entire it was like, I mean, honestly, I think it was like 70% of my net worth at that time was in that stupid stock. And I lost it all. Well, I literally

remember walking around Palo Alto, just kind of shell shocked, you know, just walking from where my apartment was down Hilton Avenue to the creamery, to grab a milkshake just just just in a daze just like I can't, I can't believe it's not coming back. And that was the worst investment I ever made.

Andrew Stotz 14:29
And what was the when you think about the size of the money in relation to the total amount of money you had, I'm assuming it was pretty much most of it.

Conor Riley 14:37
Yeah, I mean, we're talking like seven figures and like, start that out like we're talking. I I was so sure. In sort of the institutional sovereign tree, or whatever you want to call it in kind of big band was a fifth I think it was like the fifth or sixth largest bank. I think at the time $350 billion on the balance sheet. I mean, how does that disappear overnight? But

Andrew Stotz 15:11
well, maybe I'll, how would you summarize the lessons that you learned from this?

Conor Riley 15:15
Well, okay, so the first one is, everybody has a plan. And when somebody shares their plan with you, it's easy to sort of characterize that plan by the character of the person that's sharing it. Most people are a good guy, you know, those people mean well, so the men and women that work in finance, that might be seeing things and might be commenting on what they think, is it good or bad investment, really are doing so with good intention. But good intention, and whatever they're seeing doesn't take the place of real research. And you have to look at what is really going on, it was not a good time to be getting into those kinds of businesses, it was not a good time to be putting money there. And, and there were so many indicators, even at the beginning of, of when I was making those investments, that that was not the right place to put the money. And if I'd taken the time to do more than just talk to a buddy in a gym parking lot. But to really think about what I was doing, and whether or not this investment was suitable for me, then I think it would have gone another way. So that's the first lesson, do your research, figure it out, be honest with yourself, be honest with your reliability. The second thing, and I think this is very common for investors don't throw good money after bad money, you made your investment, it's up, it's down. Maybe what you see as an opportunity to double down on an investment is a viable option. But don't do it based on stock quotes you see in the paper doing as part of a general portfolio management strategy, don't put more i My rule of thumb right now is don't have more than 8% of your portfolio in any one thing. And that means like, like, one class of business, you know, keep a good diversification there, and resist the emotional hole to sort of make that big move. Everyone wants to be Gordon Gekko, and on the phone yelling at a broker by this do that. But the reality is, don't don't throw good money after bad. And then I think the last point is that when things start moving in the wrong direction, when you start seeing that maybe the bottom has cratered, get out as quick as you can. There's no, there's no benefit for holding on, I think that I was so embarrassed, that I started thinking maybe overly hopeful thoughts that the Calvary was going to come. So I was basically maintaining that position thinking that it would turn around, instead of just taking my losses on the chin and then walking away from it and just saying, hey, this didn't work out well, for me, but at least I got something, and good luck to the company. So I think, you know, like, investing gets so emotional so quickly. It's so easy to fall victim to like, sort of pseudo strategy, or pseudo data points. And so I think that that, that, that those were sort of the big lessons that I took away from that.

Andrew Stotz 18:27
Make sense? Maybe I'll summarize some of the things, I got a lot of things that come out of this. The first one is that after interviewing more than 600 people, I've identified six common mistakes. And the number one most common mistake is not doing your research. And one of the things I always tell people is, if you follow one rule, it is never by something that's recommended that someone calls you or talk to you about it. Now, that's a hard thing to hear. Because people think well, where am I going to hear about it, but what the message is, you got to do your own research, you may hear ideas all around, but you got to make them your own and do your own research. The second thing is, I would tell a story of one of the books I wrote is called How to start building your wealth investing in the stock market. And a lot of what I was talking about is, you know, the value of holding an index fund. For the typical person that doesn't know anything about the stock market, you're holding maybe 500 or 1000 stocks in that portfolio. I went to visit the Philippines, I was asked to speak about it. I had an audience of 2000 people, and I realized they don't have index fund and they don't have access to index funds. And I started to kind of wonder, okay, if they want to get the benefit of the stock market, then maybe they just need to pick stocks themselves. But I realized that's also bad advice for the typical person. So I went back and went to my computer and I started to do some academic style research and I asked the question, What if every year I randomly select Didn't 10 stocks from the Philippine market. And every year, I just randomly selected what would have been all of the different outcomes. If I did 1000 Different outs. And you could see a spread, some of those portfolios would go up, some would go down. But then I asked the question, what if I put a stop loss on top of it, knowing that the investors really don't know how to invest. And we just said, Look, if a stock goes down by 20%, during that year, just sell it. And what I found was it enhanced the performance of that portfolio substantially, and it reduced the downside. The reason why I tell the story is because if you're not an expert in the stock market, and you want to buy individual stocks, one way of doing that is putting a stop loss on the stock when you buy them. And just using a tool like that, until you get you know, more educated or more experienced. So that's the first thing. Second thing is that I've seen a lot of entrepreneurs that sell their businesses get out or make a lot of money, and they take the confidence, they had to build their business into the stock market. And unfortunately, you've got 3040 50 years of experience people out there that are trading against you. And we're happy to welcome you into the game. And basically, the game is most of those CEOs, entrepreneurs, owners of businesses that cash out, lose a huge amount of their money in a very short amount of time. I've seen it happen, it's not an uncommon thing. And if you're in that situation, if you're listening or viewing and you are cashing out of a particular company, take it slowly take time. The next thing I want to highlight is this is the risk of capitalism, the equity holders of a company can lose it all. And in this case, this is a perfect example of capitalism working. This is the way capitalism works. And it is important that capitalism is allowed to work in this way, so that we don't distort the market, you've learned a lesson, other people learn the lesson. But this is the way it works. Now, also, I want to talk about, you know, obviously, diversification is an issue that we should say, you should be diversified. You've talked about now not exceeding 8%, as an example of concentration in any particular asset or asset class. But I just want to mention about banks, particularly because we are facing some economic crisis, if you took a look at the typical company in the world, and you would look at the balance sheet of a typical company, and you say that the company has assets of 100. Those assets 40% of those assets are funded by equity, on average, 60% by liabilities, of the liabilities, maybe 20% is dead. And the rest is like accounts payable and something like that. So here we have 100 in assets supported by 40. In equity, that means there's a cushion. If a company wants to lose money, it's not gonna go out of business. But the typical bank has 100 and assets and 10 in equity is a very leveraged company, and therefore even a small loss on its portfolio, if it lost 10% of the value of its assets. 10% of its loans went bad, they can lose all their capital. And when that happens, it's gone. And that's one of the reasons why I don't invest in banks.

Those are all the different things that come to my mind. Anything you would add to that.

Conor Riley 23:34
No, I think that's very sound advice. I mean, I think you got to know what you're getting into. You got it, you got to know what game you're playing. I think if there's a, you know, someone that has had a recent liquidity event, I think your advice to go slow is good. I also think you should talk to other founders, other people that have benefited from liquidity events, and ask them how they manage their money. Because no one really knows how to do it. And when you have these conversations, you can discover great financial professionals that can sort of lead you in the right direction, great financial resources that you might benefit from learning. And, and just generally good people that might be exploring stuff. And if you've had a liquidity event that might be, you know, really large, you might be contemplating setting up a multifamily office or something of that nature. And that's, that's those are great conversations to have with other people that have sort of a similar set of circumstances. And I think for people that may have more modest liquidity events, it's still worth getting into those conversations, because one thing I've learned is that whether you've got $100,000 or $100 million, you're kind of looking for the same thing. And it's, it's it's really a good a good opportunity to kind of share your insights in the market with other people that might have insights and so it's helpful and podcasts like this This is something that listen to you share, listen to all the stories that are probably, you know, 100 joules, just like the ones that you were talking about buried here. So these are, these are the important tools that can really make a difference in terms of whether or not you're going to preserve your wealth, or are wasted all like some of us have.

Andrew Stotz 25:17
And you just have to go back and make it again. So now, you're gonna get, yeah, based on what you learned from this story and what you continue to learn. Let's imagine a young person listening to this podcast, they were very excited about a story they've gotten into it, it's falling, this type of stuff. What one action would you recommend our listeners take to avoid suffering the same fate,

Conor Riley 25:39
I would say immediately get out of whatever the position is get out of the investment, and been in some investments that are not in the public markets. That might mean getting lawyers involved on a contract, that might mean getting, you know, other people kind of involved. It might hurt some feelings and might get kind of sensitive, for a lot of people to that maybe might be the first time that they're dealing with that, especially if they're young and excited about an opportunity. But you got it, you got to just stop, get off the train, get if the trains not going to the destination you want to go to get off the train. That's the advice I would give.

Andrew Stotz 26:17
And after reading, maybe 75 books on war and battles and strategy, there are many great generals who retreat in defeat, to fight another day. So excellent, excellent advice. And let me ask you, what's a resource that you recommend for our listeners, something that you have or something that's valuable that has been valuable to you? Besides going to the gym and getting muscles and listening to the gym guy?

Conor Riley 26:44
Right, right. Definitely don't listen to the gym guy. I think that there's a lot of there's a lot of great podcasts out there. I mean, I think this podcast is terrific. I think that there's a lot of great literature out there that you can read, particularly in terms of managing money, one book that I love, Andy Kessler has a book called running money that is absolutely hilarious and awesome about their, their journey, you know, with, with, with a small venture fund, here in Silicon Valley that went from, you know, a couple million bucks to over a billion dollars in an investment. And it's such a fun ride. And it really, it really kind of brings the humor into the excitement of making all this money and then the dangers of losing all this money and what happens. So that's a great book. I recommend it to anyone. It's a fun read.

Andrew Stotz 27:37
That's a good one. And that came out in 2005 called running money by Andy Kessler. You can get it on Amazon and a great recommendation. All right. Last question. What's your number one goal for the next 12 months?

Conor Riley 27:52
For the next 12 months I'm I'm right now aggregating for different companies in the beauty space doing a little bit of a roll up we've got term sheets with all of them and hopefully it closes before Christmas. So that's that's my that's my goal. That's where I am I'm in due diligence up to my eyeballs and it's it's a it's a really fun ride on the deal making side.

Andrew Stotz 28:14
Exciting. Well, listeners there you have it another story of loss. Winning if you haven't yet joined the Become a Better Investor Community just go to MyWorstInvestmentEver.com right now to claim your spot. As we conclude, Connor, I want to thank you again for joining our mission 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?

Conor Riley 28:42
Thank you so much. This was so much fun.

Andrew Stotz 28:46
Awesome, and that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying, I'll see you on the upside.