Ep657: Brian Feroldi – Be Careful When Trading Options

Listen on

Apple | Google | Spotify | YouTube | Other

Quick take

BIO: Brian Feroldi is a financial educator, YouTuber, and author. His career mission statement is “to demystify finance.”

STORY: Brian invested in an oil pipeline company with take-or-pay contracts. This meant that the company would get paid either way if the price of oil or natural gas went up or down. Prices went down and despite the contract, the pipeline’s stock went down because its customers couldn’t afford to pay. Brian lost 70% of his entire portfolio.

LEARNING: Don’t use options as an investment strategy. Never let one company become your largest position. Be careful about trying to leverage beyond your capability.


“When my research makes me unbelievably bullish about something, that probably means I’m blind to some risk.”

Brian Feroldi


Guest profile

Brian Feroldi is a financial educator, YouTuber, and author. His career mission statement is “to demystify finance.” He loves to help other people do better with their money, especially their investments. He has written more than 3,000 articles on stocks, investing, and personal finance for the Motley Fool.

Worst investment ever

Brian invested in a company in 2013, about nine years into his investing journey. Though not an expert, he completely understood business fundamentals. He had a framework for what kind of companies he was going after. The company Brian invested in was Kinder Morgan, an oil pipeline company. That means they don’t go out and find the oil but own and operate pipelines that move oil and natural gas from the extraction point to a processing plant. The company then takes a fee for moving the oil.

What really attracted Brian to that business model was that it had take-or-pay contracts in place. Meaning that if the price of oil or natural gas went up or down, Kinder Morgan would get paid either way.

In theory, this company had locked in guaranteed recurring revenue. In addition, it was run by its founder, Richard Kinder, who owned tons of stock and continually bought more. The company had a 4% dividend yield at the time, plus a realistic growth plan for them to expand that dividend by about 10% per year. So from the outside, it looked like a very low-risk company that could earn Brian a high dividend yield.

The more Brian studied the company, the more bullish he became on its potential. So over time, he would add to the stock because he thought it was attractive. Within no time, Kinder Morgan became Brian’s number one position.

At the time, Brian was learning about options and how they work. He set up a synthetic long on Kinder Morgan. Synthetic long is when you sell a long-dated put, which brings in cash today, and you use that cash to buy a long-dated call option. Essentially, you get to benefit from the upside. So if that stock goes up, you get paid for that stock to go up ahead of time. So the returns to the investor are enormous on a percentage basis. The downside to a synthetic long is if the stock price falls, you’re on the hook for pure leverage because you don’t own the shares. Brian’s confidence level in this thing was sky-high because it looked so bulletproof. After he set up this position, the oil and natural gas prices suddenly tanked by more than 50%. There was simply an oversupply on the market.

What confused Brian at the time was that Kinder Morgan’s stock was going down a lot during this downturn. The company had take-or-pay contracts in place, and it got paid no matter the energy price, so why was this stock going down?

Even though Brian’s position was in the red, he added to it because he believed it would recover and go up. Kinder Morgan’s stock ended up falling 70%. This was because the take or pay contracts only matter if the person on the other side of the transaction can afford to meet their end of the agreement. So while the company had a guaranteed locked-in revenue in place, those customers were dependent on the price of oil and natural gas and were hurting. The customers literally couldn’t pay. Once Brian eventually learned that, he capitulated and took up the largest loss he’s ever taken.

Lessons learned

  • Don’t use options as an investment strategy.
  • Never let one company become your largest position. Instead, put a little capital into different companies and watch them grow and flourish.
  • Be careful when investing in an industry that depends on market price luck for the investment to work out.
  • When your research makes you unbelievably bullish about something, you’re likely blind to some risk.
  • Have some rules for the maximum amount you want to put into an idea because you can still be wrong no matter how confident you are.

Andrew’s takeaways

  • Don’t be seduced by your research about a company that fits in the supply chain.
  • Contracts can be renegotiated. So if you find yourself in a bad situation, talk to the people you signed a contract with and renegotiate the terms.
  • Be careful about trying to leverage beyond your capability.

Actionable advice

Write down a list of the possible business risks you want to avoid. Then whenever you’re researching an investment, run it through that checklist. This will help you avoid making the same mistake again.

Brian’s recommendations

Brian recommends reading books and watching YouTube videos to get all the information you need to make good decisions. Brian also recommends checking out his free investing checklist—the exact investing checklist he uses. The checklist contains both the positive attributes that Brian looks for in a business and the risks he wants to avoid.

No.1 goal for the next 12 months

Brian’s number one goal for the next 12 months is to keep the flywheel that he has going and continue to grow his business.

Parting words

“Learn to love the process of becoming a better investor. If you can actually find joy in the process of becoming a better investor, you’ll actually become one.”

Brian Feroldi


Read full transcript

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 an investing you must take risk 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 to join me go to my worst investment ever.com and sign up for our free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers, this is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Brian, for all the Ryan, are you ready to join the mission?

Brian Feroldi 00:41
I am Andrew, thank you for having me.

Andrew Stotz 00:43
I'm excited to have you. And I really have a lot of respect for the work that you have done. Over the years, we were talking before we turned on the recording about you know, the amazing number of articles. But having watched your videos, having read the stuff, some of the stuff that you've done, it's quality. And that's part of reason why I'm really happy to bring you to my audience. And let me introduce you to the audience. Brian is a financial educator, YouTuber and author. His career mission statement is to dis demystify finance. And ladies and gentlemen, he is accomplishing that mission. He loves to help other people do better with their money, especially their investments. He has written more than 3000 articles on stocks investing and personal finance for the Motley Fool. He's got a lot of other things going on, like books that he's written and his email list that he does in his emails that he does in his Twitter. You can find them in many places. But Brian, take a minute and tell us about the unique value that you're bringing to this wonderful world.

Brian Feroldi 01:47
Sure, well, thank you, I think you did a great job of summarizing it there. But I will say that I was someone that grew up in a household that understood a personal finances, right, the basics of spending less than you make, save for a rainy day, etc. But it was essentially not financially illiterate when it came to investments. But just to the left of there. My dad, for example, was investing in penny stocks when he was young. And despite the fact that he was into finance himself. He was an accountant. So that just shows that when I graduated from college, everything like that, I had a good solid foundation of how to do personal finances the right way, but I had no clue how to do investing the right way. And by the way, I say that as someone that graduated with a degree in business. So I graduated an undergraduate with a degree in business, I had no clue how the stock market work, I had no clue why it went up and down, I had no clue what like dividends were or share repurchases were with the s&p 500 all completely foreign to me. However, for whatever reason, I was just born to be an investor. Like some people just discover, like once they trip across investing, it just like catches them and like pulls them in. For whatever reason. That was me. When I first started getting interested in money and learning about compound interest and stuff, I would just hook line and sinker in, I experimented with a couple of different asset classes, I ultimately decided that stocks were the asset class. For me, I wasn't interested in dealing with renters or buying and flipping houses, none of that stuff. But I was like stocks, I understand. But my education level was rock bottom at the very beginning. And I started buying and selling stocks in 2004. I say buying and selling stocks because I wasn't investing. I was literally just buying and selling stocks. And I just I draw distinct the difference between the two. However, I was losing money on little bits of money. It felt awful. But man that I learned a lot of valuable lessons in those early days. slowly over time, over time, I discovered that my the strategy that works best for me is find high quality, long duration growth companies, put my capital into those businesses and then hold them for long periods of time. And my passion in life is helping other people to figure out what essentially I've learned but doing it years faster than I did

Andrew Stotz 04:15
and what type of what would be your ideal person that comes to you and really gains from what you're doing?

Brian Feroldi 04:24
Well, ideally they would be fresh out of college. Some of that's just entering the workforce because that is the time when compounding you have the years ahead of you to really put compounding on your side. I would say that most people I interact with tend to be in their 30s 40s or 50s. So discovering investing or getting interested in investing a little bit later in life and then ideal right out of college. But the wonderful thing about investing is you can do it at any age, right you can learn about it truly at at any age. It's one of those activities that you can do for the rest of your life. But ideally I would capture up 21 year old fresh out of college, about to sign up for their 401k for the first time and really teach them everything I know.

Andrew Stotz 05:06
So let's take a person, let's say, you know, out of out of university at that roughly at the age that you're talking about, and you know, there's some people that say, I'm never going to get involved in the stock market, I'm not interested, you know, I don't like numbers, whatever, okay, they're on one spectrum, and doesn't mean they don't need the stock market, they still need it, but and then there's another one on the other side of the spectrum, that's just like crazy about it. But then you got this audience in the middle that's kind of, you know, neutral, they'll they'll kind of as a learn, they'll do. And if we look at that group, I would say that group has kind of two main options. Number one, let's just say they could buy a globally diversified ETF, or fund, Vanguard VT fund as an example, and not do anything except just contribute to that for the next 20 or 30 years. Or they could follow someone like you learn about picking stocks, learn about constructing a portfolio of individual stocks, and what you know, being involved in that. Now, of course, it's going to take more time. But again, this is not the extremes where someone says, I'm not going to spend any time they're willing to spend some time. What's the pros and cons from your perspective of doing, you know, the stock selection and building and managing that portfolio? Versus the the fun?

Brian Feroldi 06:24
Yeah, so let's go through those three, three buckets that you've talked about. So if you're someone that has zero interest in investing at all, I would approach that group by first showing them how compound interest works, right. The reason that they're not interested in investing and not interested in their money is because they probably have a limiting belief that they'll never become wealthy, they'll never build wealth like that. It's for different groups of people that need education. I start there, for the people in the middle, that are somewhat interested. If they just want to index and call it a day to them, I say, excellent. That's, that's, that's what you need to do dollar cost averaging. And very simple long term investing is the right strategy for I would wager 98% of the population. However, if that is your strategy, which, which is a very, very is the trend, it should be the default strategy for everybody. You still need to know what the stock market is, and how the stock market works. So many people are following that strategy, or they're putting money into a 401 K and or an investment vehicle. And you're just like, Okay, if you just go up to him and say, Why is the stock market gone up? Why is the stock market gone up 10% per year, essentially, on average, you know, roughly, of US stock market, since you were born, you would get blank stares, people have no clue about the how the stock market works. I'm not talking about need to know about the process of going public, or how many companies are in there, just the very basics, what is the stock market? What are you actually buying? And why does it consistently create value. So that would be the education that I would focus on for that category to find all the hardcore people, the people that are in that, say, 1%, that are just like me just interested in this stuff. The thing that I would say that convinced them to do that is, I would say, you should only do that, if this interests you, you should only do that, if you will gladly if you find this so fascinating. And you find learning about investing to be so intellectually stimulating that you will gladly give up a portion of your free time to enhance your knowledge. If that trade off does not appeal to you at all, just index and call it a day. But I do think about 1% of the population is interested in investing, you're interested in learning about companies, they're interested in thinking about how they work and building their own portfolio. But even at 1% of the population, you're talking about what 80 million people around the world that could be interested in that. So if that's you, I would encourage you to find your own unique style that works for you, and really just study and continuously learn.

Andrew Stotz 09:04
So for the listeners out there, you know, first of all, you've written the book. Why does the stock market cool up everything you should have been taught about investing in school, but weren't? Would you bought out I think in 2022, which I think gives a great background there. And now let's talk about the people who are like, Yeah, I'm interested in stock picking, they're listening to this. They're viewing this they feel like that's something I want to learn more about. And where's the best place for them to go to get more of what you've got to offer?

Brian Feroldi 09:36
So if your interest is so if you take that leap from Yes, I've learned about the stock market and I'm interested in actually constructing and picking my own stock. People are spoiled today with the plethora of options that they have. I mean, when I first started investing, really the only way that you could learn about how to invest was books, right? And you'd go through that you would scour through the classic investing books right Get one up on anything by Peter Lynch went up on Wall Street and beat the street anything by or about Warren Buffett, anything buy in about Charlie Munger, anything buy in about Benjamin Graham, The Motley Fool was actually coming out with some books at the time, like the Motley Fool investment guide. Heck, even Jim Cramer has some pretty good educational which books out there that teach you some of the fundamentals of investing. So for me, the first step, if you're interested is always the same. Educate yourself, educate yourself, and go through at least develop some kind of process for identifying businesses and investing in them. And then just get some skin in the game, you learn 100 times faster when you actually have money on the line, then when you don't, but start small, there's no need to rush in, always make sure that you educate yourself before you make before you increase the size of your bets. Because the worst thing that you can do is to make huge outsize net worth moving bets with that you don't understand

Andrew Stotz 10:57
great advice. In fact, um, one of the things I was just thinking about on my bookshelf, here is, this was in 1993, when I started to be a financial analyst in Thailand, where we didn't have libraries like with, you know, all these books, and we didn't have bookstores with all that stuff. I managed somehow to get this book called security analysis, Graham and DODDS book, and it's actually quite, you can see, it's kind of getting faded on the inside, they got all the ratios. And that was all that we had. And I just, you know, went through that to try to learn. And now as you say, We're spoilt for choice, you know, the ability to invest is so easy. So for the listeners out there, just I'm gonna put in the show notes, your site, Brian, for all the and.com. And that's where you can learn more about it. I just would like to ask one last thing, before we get into the big question, what I've seen, you know, some of your different frameworks. And that's what I like about the way you think is you use frameworks, things like anti fragile and all that stuff. Maybe you could just tell the audience about one of your, the ways that you think about things so that they could get a picture of the type of thing that they would they would learn more about if they sign up or join,

Brian Feroldi 12:16
sir. So by and large, one of the mistakes and one of the things that I didn't understand about businesses in general, was how the business growth cycle works. And essentially the stages that a business goes through, as it hopefully becomes, let's say, the ultimate goal is becoming a dominant s&p 500 constituent or something like that. When you just pull up pull up. stock tickers, all stocks look the same, there's just a ticker. And then there's a price, right. And that is the information that is shoved in people's faces all the time, right, you get the stock ticker, you get the dollar price, and then you get the price movement in the last trading session. That's the information that's in your face all the time. When you're doing that all stocks essentially look like they're the same thing, right? It doesn't matter if it's a micro cap, no revenue business with lots of debt, no insider ownership, everything. Or if it's apple, which gushes cash at a theaters, right, all they are is two different tickers. But I think it's really helpful to develop to learn about the business cycle. So you can learn to separate where businesses are in their growth cycle. For example, my investing style is to typically look for smaller, high growth businesses that are nearing that are nearing the break even phase of their of their growth cycle that I believe can reinvest in their operations for 510 plus years, and really compound their value for a long period of time, I'm looking for the proverbial 10 baggers out there, and I'm happy to scour and own companies for multiple years and give them a lot of leeway to execute against whatever opportunity they have. So I'm on the riskier the semi riskier side of that growth curve. Other investors want dividend payers, right they want, they want companies that are buying back stock that is on the other side of the growth curve that the company has already achieved. It's captured as market opportunity. And now it's really in Harvest, harvest mode, extracting as much profit as it can from its customers and returning those to shareholders. So that's the kind of thing that we teach people to do. It's like identify where it isn't a growth curve, identify what type of investor you are figuring out some basic frameworks for judging business quality and how to buy them and hold them for long periods of time.

Andrew Stotz 14:31
And just for the listeners out there to kind of differentiate that, you know, it sounds like there's a lot of people out there that talk about, um, buy, buy good quality companies at good prices and stuff. Well, a lot of times what happens is you don't get that much of a potential of a big return, because they're already producing a return on invested capital that's above their cost of capital. And that's in the price and it sounds like also it sounds like you're not talking about turnaround You know, there's some people that love bombed out stocks and say, Yeah, this is gonna turn around. But what you're talking about is the companies that are at that point where they're reaching the economies of scale or the other factors that are going to lead them to get a return on invested capital that's going to rise above their cost of capital, maybe steadily for 510 20 years. And we know that when a company is expanding its revenue growth and expanding its margin. It's driving massive EPS growth that has the potential for 10 times. What is that describing it? Right?

Brian Feroldi 15:34
Yeah, I think that you're dead on. And I will say that I'm not interested in business turnarounds. But I don't mind investing in stock turnarounds. And I differentiate the two to say, some businesses are executing, their businesses are continually improving. But as we've seen over the last 18 months or so like that some of these stocks is business fundamentals are rapidly improving, have seen massive, massive deterioration in their share prices, simply because their valuations were show stretched in 2020 and 21. And we've seen the unwinding of that. So I don't mind and best thing in stock turnarounds. It's not my primary focus, but I don't mind investing in those. But I avoid like the plague business turnarounds.

Andrew Stotz 16:14
Right, fantastic. Well, what a great intro, and for the listeners out there, I'm gonna have all the links to your resources and your sites in the show notes. 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.

Brian Feroldi 16:32
Sure, so the company that I'm going to highlight I invested in in 2013. So I was about nine years into my investing journey, I definitely wasn't an expert at everything. However, I completely understand business fundamentals, I had a framework in mind for what kind of companies that I was going after. And at the time, Kinder Morgan was and is a oil pipeline, a company. What that means is that they don't go out and find the oil, but they do own and operate. These pipelines that move oil and natural gas from the extraction point down to a processing plant, and they take a fee for moving out. What really attracted me to that business model was that they had these what are called take or pay contracts in place, meaning that if the price of oil went up, or the price of oil went down, same thing for natural gas, in theory, Kinder Morgan was gonna get paid either way. Because that's the deal that had with these its customers, it was just moving the energy in the fossil fuels. It wasn't selling them and selling them at a higher price and extracting them like that. So in theory, this company had it locked in nearly guaranteed recurring revenue. In addition, it was run by its founder, rich Kidner, who owned tons of stock and continually bought up and the company was in the capital return phase. And it had something like a 4% dividend yield at the time plus a realistic growth plan in place for them to expand that dividend by about 10% per year as capital growth. So from the outside, I said, this is a company paying a dividend, a realistic growth story in place, it's got a founder led management team, its revenue seems all but guaranteed. This looks to me like a very low risk company that I could earn a high dividend yield from and get some growth to sew it up exactly checks so many boxes for me. So the more I learned about this company, and the more I studied it, the more bullish I became on the on the potential. So over time, I was adding, adding, adding to the stock because I thought it was attractive, it became my number one allocation position by just the amount of cash that I put into it. And then to make things even more, I was even so bullish on this company. At the time, I was learning about options and how options work. And I set up what's called a synthetic long on Kinder Morgan. Synthetic long is when you sell a long dated put, which brings in cash today, and you use that cash to buy a long dated call option. Essentially what you're doing is with Pure Leverage benefiting from the upside. So if that stock goes up, you essentially get paid to get paid for that stock to go up ahead of time. So the returns to the investor are enormous on a percentage basis,

Andrew Stotz 19:37
and you must be smart to create a systematic

Brian Feroldi 19:41
of course, right and in addition to that, in addition, the downside to a synthetic long is well if the stock price falls, you're on the hook, right? You're on the hook for pure pure leverage because you don't own the shares. But again, my confidence level in this thing was so sky high because it just looked So bulletproof. Well, after I set up this bullish position, and I had this allocated to be my number one position, what happened next is energy prices fell through the floor fell through the floor, I mean, oil tank, natural gas prices just absolutely tanked by 50% or more, they were simply an oversupply on the market. And if you know anything about energy prices, you know, the history is up and down, right, up and down, up and down, up and down. That's just it's a boom or bust cycle. Now, what confused me at the time was during this downturn, whichever entirely understandable, Kinder Morgan stock was going down, and I mean, down a lot. And I was scratching my head, like, I don't understand the market is so wrong here. This company has take or pay contracts in place, it gets paid no matter what the price of energy is, why is this stock going down? So even though my position was in the red, I added to it because I was like, well, now the dividend yield is five or 6%. And everything that company is saying is still in place? Well, since the you know, the title of this podcast, you could probably guess what happens neck peak to trough, Kinder Morgan stock ended up falling 70% 70% on my number one position, plus some options in on top of that. So the thing that I didn't understand, I understood a lot about Kinder Morgan's business. But the lesson, the thing that I got wrong was take or pay contracts only matter if the person on the other side of the transaction can afford to meet their end of the agreement. Right. So while the company did have, quote, unquote, guaranteed locked in revenue in place, those companies those companies were dependent on the price of oil and the price of natural gas, and they were hurting, they were really hurting that the big drawdown in the energy prices was really putting the pinch on their financial statements. So Kinder Morgan was being forced what while its contract said, ABC, you only this amount of money, its customers literally couldn't pay it. And they were demanding mercy, from Kinder Morgan, to help them meet their obligations. So in some cases, they stretched out the payment, so that they did so that they still owe them the money, but it wouldn't be owed for years. Other types, other cases, those contracts were renegotiated completely. So the market understood that the market understood that as energy prices go down, Kinder Morgan might be insulated, but not through the secondary knock on effect. I didn't understand that. And that caused me to event once I eventually learned that I capitulated, I bought out my options contract and I took up so far the largest loss I've ever taken.

Andrew Stotz 22:54
And so how would you describe the lessons that you learned from them?

Brian Feroldi 22:58
Well, there's a bunch of lessons that I learned from that. The first thing I learned is something I still believe today, which is just don't use options like options are so tempting, so tempting, and when really bad thing today is that if you sign up to some modern day brokerages, they make it incredibly easy for anybody to start playing with and buying and selling options, even people that I think have no idea what I was doing. Now, I back in 2013, moved brokerages so that I could get access to trading to buying and selling options, I moved access to that I could do that. So I had to take extra steps. To do that. I had to like fill out paperwork and all kinds of stuff and I was a pretty experienced investor at that point. Moreover, I kept my options exposure to like 5% of my portfolio so I did not go balls to the wall crazy on them. It still hurt when obviously they work against you. But I didn't do anything nowadays you can like really get into a lot of trouble very quickly if you buy and sell options. But that would be less than one for me, which is just you don't need you don't need that we leverage right Warren Buffett says it best he says if you're smart, you don't need leverage. If you're not smart, you just shouldn't you shouldn't use All right, so that would be Lesson number one. Lesson number two, was about position sizing. That making forcing a company to become my number one position through my continually putting capital into it is something that I don't do now. Currently my current strategy is to put in a maximum of 3% of my capital into any given investment in any given time. After that, for a company to become a larger share my portfolio the company has to do the heavy lifting right I don't mind if I put 3% in and double like the stock doubles in my exposure goes up that way. But I have learned that I'm Not gonna force a company to become my largest position by continuing pumping capital into it, I would much rather put a little bit of capital and watch a company grow and flourish, then we kind of forced it in there. And then the final lesson that I learned is just about that important counterparty risk. And ever since then I've essentially sworn off any cyclical industries, right commodities, I don't I don't play in the fossil fuel industry, I don't play and not because I don't think I couldn't understand it. And there's also there, there could be lots of good investments in there. The thing I don't like about that industry is, by and large, that industry is largely dependent on a factor that is completely outside of management's control, right. If you're an oil oil maker, you can be the best oil man in the world, if oil prices dropped 70%, your business is hurting, right? If you're a gold make, if you're a gold miner, you have the best mind in the world, gold prices dropped 30% Your business is in trouble. So business is hard enough, I don't also want to have to depend on a look of a market price for the investment to work out.

Andrew Stotz 26:08
Fantastic lessons, maybe I'll just share a couple of things I take away first is, you know, don't be seduced by the research you do on where a company fits in the supply chain like that, that it no research ultimately can perfectly protect you. You've got to understand the sentiment as I was thinking like, the sentiment ultimately overran what your feeling was about those contracts, which reminded me of his a little story where I left a company, and I walked across the street and I took the material that I had at that company. And I hired a guy that I worked with at that company walked across the street and set up a competing business. And I was in violation theoretically of my non compete clause and on my non solicitation clause to not hire this other employee of the company when I learned and I teach ethics and finance and I asked the students, so did I violate the code of ethics and CFA and all that? And they said, Well, you must be right, you know, you're violating your contract. And I said, Well, I didn't, because what did I do? I asked my boss, could I do it, even though it says it in the contract. And he agreed that they didn't need this anymore, and they didn't need that particular employee anymore. Therefore, he exempted me from that portion of the contract. And my point is that contracts are not written in stone. When rushers come on a company or an industry contracts can be renegotiated. And the lesson also, for everybody out there is that also means your contracts that you're in, you know, if you find yourself really in a bad situation, then go talk to people that you signed a contract with. So that's my first thing I was thinking about, like nothing is locked in. And that's the first thing. The second thing is I saw when you wrote, I was typing while you're writing, I wrote down, don't use drugs, they are so easy. Oh, sorry, don't use leverage. Sorry, I think it was leveraged, you said, right. But I was thinking about, you know, the what's happening around the world, and particularly in the US, it's like drugs like Adderall and all like things like that they, they accelerate some activity in your brain, but it comes at a costs. And you may not see that cost, but one day is going to come. And so be careful about trying to leverage beyond what your capability is. And then the third thing is the position sizing, I think it was interesting. What I do for my strategy is I do equal weighting. And every three months, I re balanced back to equal weighting, which, you know, if you just compare to market cap weighting, you tend to outperform a market cap weighted type of index. But it just, it kind of makes things simple. For me. I have a simple rule on that. But those are the things I did take away anything that you would add to that.

Brian Feroldi 28:58
Yeah, no, I think that you're spot on and leverage is just so tempting. It's just so tempting, right? It's like why would I settle for a 10% return, but I could use some leverage and get a 20% return or a 30% return? Oh, it's so tempting to want to do that on the way up. But the other thing I'd say is when I feel when my research makes me unbelievably bullish about something that probably means I'm blind to some risk, some obvious risks that I can't see. So yeah, to your point, it's very easy to fall in love with your own ideas, especially when you're viewing them through the bullish lens. Which I think that's one of the fun parts about investing because as you know, like the math is so in your favor, if you fall in love with 10 ideas and one of them actually works out the way that you want the gains from that can pay for all the nine the losses on the other other nine, but I still think it's a good practice. Just have some rules for yourself about Max Same amount of allocation that you want to put into an idea because no matter how confident you are, you can still be wrong.

Andrew Stotz 30:08
And the next question I'm asked you, most people can't answer. And because they always give me two or three reasons, or two or three actions. So what I ask is based upon what you learned from this story, and what you continue to learn what's one action that you recommend our listeners to take to avoid suffering the same fate?

Brian Feroldi 30:28
Write down a list of write down a list for yourself of all of the possible business risks that you yourself want to avoid. For me, that's things like, I hate high levels of dilution. I don't like high levels of conflict, customer concentration, I'm allergic to accounting problems, I don't like foreign currency movements, etc, I wrote down for myself and on my checklist has this big list of risks that I want to avoid. One of them is commodity price, risk. And whenever I take an investment, whenever I'm researching an investment, I run it through that checklist. And that can help me to avoid making the same mistake again, because it's easy to talk about this now when it's new. But when you're researching a company, for the first time, you're like, it's hard to think of all the risks that you thought of previously. So just write things down. It makes things so much easier.

Andrew Stotz 31:23
Yeah. And there's a great book called The Checklist Manifesto, which talks about the value of checklists, so. So the next question I usually ask is, what's the resource that you recommend, and I first of all want to recommend to everybody out there to go to your website, and I'll have that in the show notes. So there's so much resources that you're providing for free, and you know, that's valuable. But besides that is what's a resource that you'd recommend.

Brian Feroldi 31:50
So I'm a big fan of, I like to read books, I also like to watch a bunch of YouTube. So between those two things, you can get the information that you need to make good decisions. But to your point about resources. I do have available on my, on my website, a free investing checklist. And it's literally the exact investing checklist that I use, it's both the positive attributes that I look for in a business as well as those risks that I want. And it's in a Google sheet. So you can just make a copy of it and adapt it as you see fit. So yeah, if some if people are interested in doing that, or at least starting with my framework moving forward, it's free. It's just at Brian frosty.com.

Andrew Stotz 32:29
Fantastic. Last question, what's your number one goal for the next 12 months.

Brian Feroldi 32:33
So my personal goal, my business goal for next 12 months is really to just keep my flywheel that we have going in the business spinning. With me and my business partners are growing pretty nicely on social media growing our newsletter, and we all enjoy teaching. So we have these live cohort based courses that we offer on things like how to read financial statements, how to think about valuation, how to learn about advanced competence, concepts like return on capital weighted average cost of capital, etc. So it's really my goal is pretty simple. Just keep the flywheel that we have going and continue to grow.

Andrew Stotz 33:10
And for those people that go to your website, they're gonna see courses is one of the downloads or one of the one of the menu items and you've got the course financial statements explained simply. Nice,

Brian Feroldi 33:22
yes. All right. We try and make it dead simple to learn how to read them.

Andrew Stotz 33:26
Fantastic. Well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you not just join that mission, just go to mind worst investment ever.com And join the free weekly newsletter called become a better investor newsletter to reduce risks in your life. As we conclude, Brian, I want to thank you again for joining our mission and on behalf of East Arts Academy, I hereby award you alumni status returning your worst investment ever into your best teaching moment. Do you have any parting words for our wonderful audience?

Brian Feroldi 34:00
Sure, given the audience here, my parting words would be learn to love the process of becoming a better investor. If you can actually find joy in the process of becoming a better investor. That's how you'll actually become one.

Andrew Stotz 34:14
Great advice 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.


Connect with Brian Feroldi

Andrew’s books

Andrew’s online programs

Connect with Andrew Stotz:

Further reading mentioned

About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

Leave a Comment