Ep670: Bogumil Baranowski – Be Careful With Businesses in Secular Decline

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. Join me go to my worst investment ever.com and sign up for the free weekly becoming better investor newsletter where I show 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, Bogumil Baranowski. Bogumil. Are you ready to join the mission?

Bogumil Baranowski 00:40
I'm ready, I'm ready. Let's do it.

Andrew Stotz 00:43
All right, let me introduce you to the audience. Bogumil is a founding partner of Sicart Associates, a New York City investment firm. He also has almost two decades of investment experience. He holds a master's degree in finance and strategy from How did you say that sounds is Paul

Bogumil Baranowski 00:59
spell. That sounds Paul

Andrew Stotz 01:02
Sciences Po Paris, and a master's in finance and banking from Warsaw School of Economics where I actually gave a presentation through CFA many years ago. He is the author of outsmarting the crown and money life family which I have right here my hand and read ground. He is the host of talking billions podcasts. voguing, they'll take a minute and tell us what's unique that you are bringing to this wonderful world.

Bogumil Baranowski 01:30
Oh, wow, what an introduction. Well, first of all, thank you, Andrew. And I had the pleasure of having you on my podcast, we had a wonderful conversation. So it's nice to be back with you and chat more? Well, you covered a lot, a couple of things I want to mention. So I was studying economics and finance, and I didn't really know what to do. And I wasn't really sure about my path. And you might know already, but I picked up a book one up on Wall Street by Peter Lynch. And I know that a lot of investors started with that book. And for anybody listening and curious about investing, what really stood out to me, was the idea that stocks are small pieces of businesses. It's such a simple idea. But all my professors teaching me all kinds of very complicated things never told me Listen, you're buying a small piece of a business. They told me it's a casino that stomacher is a casino. And it was about the time when the.com bubble burst. And I think a lot of them actually lost their money. There was one professor that really hated on Amazon. And I think he lost his shirt in Amazon. And obviously, we both know that Amazon continued to grow from a reset price point after the.com bubble. But I continue to pick up many books about investing, I discovered Buffett and I continue my journey. I was born in Poland, went to schools around Europe, and then ended up in New York where I spent most of my career. And we can talk more about it. But the one thing I do remember that I want to emphasize and it's relevant to this talk is I remember my very first conversation with my future business partner and principal seeker, who was still my business partner today at the new firm that we started seven years ago. And I remember I was 2524 out of grad school. And I met him for the first time and I had all the questions to him about how I can avoid losing money, speaking of worse investments ever, and I think he found it so refreshing that this kid, a lot of kids out of school want to know how to make money. And here I was asking, What can I do not to lose money. And I had all the questions about Enron. Enron was one of the names one of the stories at the time that completely imploded, and I'm sure your audience might be familiar with it or can look it up. And I think you've found it really refreshing. And he might be the reason why he hired me and might be the reason what my I've been working with him for almost two decades. So I always start with what can go wrong before I can get excited. What can go right and make money for me. So that's my story in a nutshell.

Andrew Stotz 03:51
It's interesting for the listeners out there to think about like, what's your bias? Or what is your story, that type of thing? Usually, it comes from the past. And it's interesting to see, because I know you've got a little bit of that maybe you could tell us why. Why were you focused on you know, not losing as opposed to you know, there's plenty of other people kind of maybe happy go lucky. And they like, let's wait and let's go play.

Bogumil Baranowski 04:19
Well, I grew up in Poland, that's where I was born. And I got to see a lot of change in the first two decades of my life. So first half of my life. I'm 42 now, and the first decade was the last decade of the communist era in Poland. So there was no free market economy. It's such a bizarre experience to explain to anybody what it was like. So everything was owned by the government. There was obviously no stock exchange for 50 years or so. And there was no investing and people would hide their savings in the dollar in dollars, though was gold. So it was a very different mindset. Now in when I was around 10. The Berlin Wall fell, the country opened up and the economy just started to fall. flourished in a way that just blew everybody's mind. And just this untapped potential human potential was released, people could start businesses, people could pursue studies they want, people could import export, anything was possible. So it was kind of a wild west in many ways. And what followed was hyperinflation, the adjustment of the system from Frozen communist era to a free market economy, one of the shocks was hyperinflation. So I got to see very quickly what I know later on was covered in history books over, you know, 50 years or 100 years, maybe even more, the stock market reopened, it looked more like the 1800 stock markets or the emerging market. In the early days, very few stocks were listed, the volatility was all over the place. And it wasn't really, it was casino in many ways, but you could hear stories of people making money very quickly. So I heard a lot of stories of people making money quickly, both as intrapreneurs, something really worked for a brief period of time, they were importing a certain good, and then that opportunity went away. And then I saw people make money in the stock market and then and lose it off. So I think I grew to appreciate very quickly that yes, you can make money but keeping it as is as important. It kind of led me on the career path that I'm on now where we've managed Family Fortunes over generations. And that mindset of making money is one side of it actually keeping it is the second side of it. And as I was in college, the.com bubble was happening. So I watched all that happen in Poland. But then I was watching the world more and more . We had access to financial times. I was just looking for anything to learn more about the world. And I was watching it with great curiosity. And it was confirming what my professors were telling me, which is the stock market is a casino. And I think if I didn't pick up that if I hadn't picked up that book by Peter Lynch, I don't think I would be talking to you today about stocks, he might be talking about something else. But interesting, I had in the back of my mind, as much as you get excited about the upside, engrained the loss, whether it was the hyperinflation, the money can lose its value overnight, my parents were paid. And by the end of the month, that money was worth much less than it was at the beginning of the month, the US and develop is now experiencing a slight taste of inflation. And everybody is so unfamiliar with the concept, because it's been decades since the US or a lot of the world has had it. Obviously you and I emerging markets, Poland, but personally and big parts of South America. There are countries that have had that experience. It's just not talked about enough what inflation does, and then any young market and all the risks that come with it. So I think from the beginning, I was excited about the idea that the market can offer upside. But I wanted to really understand where I shouldn't go not to lose money. And that's that's the big question I had when I got to sit down with somebody like Francois CCAR, who at the time already had 3540 years of experience.

Andrew Stotz 08:03
And one last question, before we get into the big question of the podcast is how do you guys tell us what you're doing et Cie card? Like, what type of clients that you're taking care of? And, you know, what's your methodology. So we understand a little bit more about, you know, what you're doing there.

Bogumil Baranowski 08:21
So we work with families and the legacy business, these are Family Fortunes that they back, you know, 100 200 years, and I have worked with those families for the last two decades, and Francois de card since 1969. So we as a team of, of six of us, for partners, we've been with those families for a long time. Now, the newer clients are people that created wealth in this generation, either they saw the business or they had a very successful career. And they aspire, they hope that their fortune can last their lifetime, and maybe more. And what we do is, it's public markets, stocks, that we do our own research in house. And it's long term patient. And when I say long term patient, we actually mean it. A lot of people say long term patient, we are willing to wait three, five years and even longer for our investments to work out when we can talk more about it. I have so many stories and examples where we would wait for a stock to perform for a year or two, it was dead money. And it's very easy to give up on a dead money kind of idea. And we have the luxury that our clients think the same way. So they're in the keeping the wealth mindset, obviously the wealth continues to grow, especially if you don't take too much out if you're living a certain lifestyle, and it's a substantial capital, that time works in your favor and you don't really have to chase very high returns, what's important to them and what's important to us it's too to avoid massive losses, a permanent loss of capital that's really significant to us. And what I like a lot about what we do is that I know the people behind the portfolios And that's something that I wasn't taught at school. So not only I was told the stock market is a casino, I hope that's not what's taught these days at universities. But also, nobody told me about the people behind the money. And you can come up with a beautiful formula and have a nice chart. But at the end of the day, you're sitting across the table with somebody, and it's their inheritance or lifetime worth of savings, or a business, the soul they've been building for 50 years, that money has an emotional dimension to it. And we say that it's the money that the clients don't need that immediately. But it's like they can't afford to lose. And it's that balance between, yes, we can commit this money for the long run, but it's also the money they can replace. And I think it sets our expectations, their expectations, and our framework in a certain way, would kind of aid most investments we would never entertain and what kind of investments can work for this kind of a mindset.

Andrew Stotz 11:00
Great. One of the books I read, called your money in your life, or your life many years ago, talked about how money is ultimately your energy. And when I was thinking about, you know, for instance, my one of my businesses are a coffee business that we've had for almost 30 years, it's 30 years of energy. Yes, you know, it is not just cash in the bank, it is. And if people would look at their salaries, the same way is that it was an investment every single day of your energy, you know, you would think differently about the way that you manage it and the way that you spend it in the way that you save it the way you invest it. So that's great to hear. And I think, what struck me when we talked when we talked on your podcasts, and when I listen to your podcasts and read your book is that, you know, you take your time, you're a thoughtful person. And I think if we start with that, 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.

Bogumil Baranowski 12:08
So I have a few stories. So I have two ideas, one that we actually, and we lost money in and we lost time in. And I felt you mentioned time I felt that the loss of time in that particular investment hurt me much more, and the loss of money. And I'll explain why. And the second one is more of a case study, an idea that we watch from far away that we kind of could tell that it will implode at some point. And there's an article that I wrote about it, that people can Google, and I'll tell you how to find it. And it's a great case study of a couple of things that happen at the same time that are sources of trouble, which is the third part of what I want to talk about. So we go back through the ideas that we looked at or owned or decided not to own. And then I keep them in a spreadsheet and I refresh it now and then I want to see what happened. And I feel like it's the best way for me to keep a record, but also to learn from mistakes that I committed and mistakes that I'm glad I did not commit, I feel like there's a lot to learn from. And people do it in various ways. They journal I like to kind of keep a list of things that tend to point

Andrew Stotz 13:14
before you go. I would say most people don't do that, including myself. You know, think about the mistakes that I got close to but I didn't make no maybe I keep that in my head. But it's an interesting point.

Bogumil Baranowski 13:28
I think it's nice to just see it. If it's even if it's a line in a spreadsheet, and you look at it, and it immediately brings back all this. This is the story. And if you have room you can put in a little note. But just to start from the end kind of but there are three sources of trouble that we identified in the universe that we invest in. Right, we're talking about public stocks, public equities. And we like to find quality businesses, so established businesses with profits, health unit economics, I'm not talking about the profit, less profit free sector of the world that exists these days that it's not investable, in my mind. But among those, there's still trouble, you think you did all the research, you checked everything. And when I go back, I found three red flags that keep on repeating one is too much debt. The second one is questionable management. And it doesn't mean that there's fraud or criminal charges. Although one of the examples that I'll talk about, there were actually criminal charges. And it's just a management that might be over promising and under delivering over and over again, or the practices are not really the ones we're comfortable with. So too much debt management and then secular decline and secular decline. It's very tricky place to be because as a value investor of somebody that wants to find a bargain deal. We end up looking at companies that might be in a phase of their life when the growth is slowing down. And it's very hard to pick up if it's just a temporary issue. The wrong product, the wrong market the wrong strategy, or or if it's actually something that's leading to a decline in in business and unbuffered measurement mentioned not long ago that he has owned, throughout his lifetime, many businesses that ended up disappearing, the business went away, the consumers were not no longer shopping for that product. So, first idea that we own, it's very fun. I don't know if you know it, but Verifone has credit card terminals. If you go to a supermarket, there are two three brands that you'll see if you actually pay attention and look where your card goes, what you touch, or swipe, or whatever it is that you do. And we looked at it, and we ended up buying it probably over 10 years ago. So 2023, I think, was 2012 2011. Maybe we picked it up as value investors would, because it was a cheap stock getting cheaper. And they just acquired Hypercom, one of the competitors, and it looks like they're very well positioned with Ingenico being the other competitor to really share, market share, and coexist. In a still growing business. There are a lot of questions about the payments, changing their new entrants Square was entering the market is soon enough. But we paid attention to how cheap it was, there were some questions about how the merger will look like. And the management, we felt like we were not really getting the full picture. I feel like it's too rosy. But we thought the price is so good. And I think that's one of the mistakes a lot of value investors make. And it's something I try not to do again. If it's so cheap, you try to compromise that oh, you can overlook the debt that was added for the acquisition, we overlooked how challenging the acquisition can be. We overlooked how the management and you can kind of compare the three things that I just mentioned, we overlook that the management was not exactly the team we were comfortable with. So soon enough, the management's changed, new people came in, I think there was a temporary chairman who actually ended up coming to our office and talking to us. And we invested so much time in understanding all the pieces and the payment systems and how this the products are sold and all the pieces. As an analyst. You know, at some point, you spend so much time you're invested not just with money one time, and you feel like I'll keep on trying to figure out if there's a way for us to make money in it. And obviously, the stock stepped down 10% 20% 30% 50%. So it was getting cheaper. But the earnings were also dropping. So the multiple was not really falling much more anymore. And there was one tipping point for us when we met with the new crew of the new management. And we thought, I think this is the time, this is the time to, to just drop it. And we dropped it, we walked away with probably a 5060, maybe 70% loss at the time. And I have to tell you that the relief of just walking away and knowing that I will not waste more time on this idea was very valuable to me. And what I learned from it is one, just because it's cheap, don't compromise on all the other things that I mentioned, it's not worth it. And second, decide to cut your losses and not just think in terms of money, but also in terms of time early on. Because there's this tipping point where you get so invested in you spend so much time you're holding on to it, hoping for something to happen. And I think it's just a waste of time. So as an investor money is one thing but time to don't don't waste too much time on it. Now the idea that we looked at is Steinhoff, it's a retailer in South Africa that started in Germany. The interesting story about it is going back to childhood, this company, and I didn't know it at the time, but they were importing furniture from communist countries, and I believe also Poland, to Germany and then reselling, at probably very good prices. So it wasn't a bad business. And it took 50 years to grow. And one of the management's decided to get more aggressive with growth. And we're talking about something that happened five, six years ago, when the company ran into some trouble. The reason why I looked at it was a couple of people that told me it's an interesting story. And I have my own reservations about retail and curious about your fonts and true but retail seems to be a business that does very well until it doesn't and somehow and so often a near death experience. And so I put it on the list. I did my work. I looked it up, I didn't research and I thought I see the same three flags that I mentioned. So the company was piling up debt very, very quickly. I think the market cap reached 20 some billion and I think they had about 20 billion in debt accumulated. Now. It was the zero interest rate time in Europe. So a lot of the money was raised in Europe and in the article I tie it back to the monetary policy. The money was so cheap. They could find it very quickly. And they were not that picky about What they were buying, and they bought one of the US mattress businesses that was rolling up mattress retailers in the US at a very high premium, I think was over 100% premium. And I thought an over leveraged company is buying another older leveraged company at 100%. Premium and borrowing money as if there was no tomorrow. And when I watched the management, I listened to them. And I read what they were saying, I felt I'm just not too comfortable with what they say. But as I was learning their story, one of the executives was featured on one of the covers of some magazine, a prestigious magazine, and I wish I saved that cover because I couldn't find it after the company imploded, that he's the new visionary of retail. He's the one that figured out retail. And I thought I'd never knew anybody that actually figured out retail for the long run retail somehow is a business that has swallowed a lot of egos. And so I made a note of it, I kept watching it. And eventually, very soon, I think a year later, this company ended up going to almost zero, I think was a near bankruptcy, they negotiated a deal with the banks. But obviously the management was fired. There were some criminal charges. I don't remember the details. They had to restate their filings. And, you know, the massive debt became a big issue. And you have a, as I mentioned before, as secular decline kind of business, right. So when you think about those three flags, they coexist, they kind of happen at the same time together. And I don't know if which one starts the story here. But if you have a business and industry that's struggling with growth, by definition, you'll find companies that are borrowing money, to show growth through acquisitions. And if you have management that's not 100%, top notch, they will start to overpay, they will start to borrow too much. I think the funniest thing to me was that the bonds that Steinhoff was issuing ended up on a balance sheet of I think it was the Bank of Finland, part of the ECB system, because this was the time when ECB was buying corporate bonds, and they were running out of bonds to buy. And I don't know what the statistics are now. But at that time, five, six years ago, the corporate bond purchases were very, very high, they might remain pretty high. Now, I don't know enough about the current policy. But then I was reading because I was curious who owns those bonds, who would give the money to a South African retailer that's growing and aggressive rates and buying overpaying for us retailers. And there you go. Somebody put it on a balance sheet of a central bank, I think, to me, this was such an interesting overlap of how you should not run business and how you should not run interest rate policy all in one and what the consequences could be. At the end of it all. So yeah. And people can look governments can do with your money. Exactly, exactly. And, you know, enabled certain practices that I think would be harder to pull off if the rates were higher. I think that was one of the things so so but if people Google Steinhoff and my name they'll look they'll find the article I wrote it up in a lot of detail, but that was to me a case study in trouble. that were to happen.

Andrew Stotz 23:27
Yet, it's interesting because as in the type of investor that you are, when you look at stocks, as companies, not as a casino, a sudden, not only the ones you invest in, but ones you don't invest in, require money or require energy required time. It's true, that you're investing a lot of time in that, which is why I think a lot of people like to think of the stock market as a casino or a place where you just go and buy and sell. Because it doesn't require you know, and you know, the more bizarre part about that, is it investing your intellect and your energy does not necessarily mean that you outperform. That's trends it does. Sometimes it doesn't.

Bogumil Baranowski 24:11
That's very true. So I invested a disproportionate amount of time in Steinhoff, because I wanted to show this as a case study to our interns. And I think five minutes into reading about this company, I was ready to say no, no matter who was recommending it to me, but I thought I'll invest that time because I'll show this case study to an internet to Internet. I'll tell them, look what happened. I think it expands the imagination. And you can see what can happen. We have a no zero policy. And it's just the goal of not having an investment that we could picture going to zero. So it's actually a short list of companies that you can think of that have either a lot of debt, have failed unit economics, so a lot of the world that we don't want to participate in, or you know, business prac Two pieces that are questionable. I mean, to me, we work that barely managed to go public eventually. But it's one of the companies that I always thought I would never invest in my own money. The policy is that no matter what the reward is, the first thing we have to know that I can't imagine a zero in this investment. Now, things happen, right, and they could be a fraud and something I couldn't think of. But when you really think about it, you compromise and you accept certain policies that accompany it. So you shouldn't be surprised down the road that bad things happen. But if you have upfront and no zero policy, no matter what the reward is, we wouldn't buy anything new bankruptcy betting on maybe the bankruptcy will not happen, and so on, people do that. So we just exclude big parts of the market, I don't want to have anything. And when I say zero, I also mean a 95 90%. decline, right? Like, to me, it's anything that can have that kind of risk. Recently, people were telling me that Carvanha, which had a failed economics had company that offers purchase and sale of cars online. That it's, it's this new way of selling cars. And when I read about it kind of like retail, used car sales, as a business, it's a very simple and traditional way you move it online, but if you're have failed economics, it will eventually catch up with you. And I know very smart people that invested in it and ignore it completely. The management had had already some issues before, I don't know if there was some, there was some story with one of the founders that had some run ins with the law. So you could tell that people that are running it have questionable practices. And then you had a company that was had failed economics. And the end result was the stock went down 97 98%. So this was a business that no matter how many people pitch to me, I would not want to participate. I think it's not only what you're buying, but as you mentioned, would you choose not to buy that can really make a difference in the portfolio?

Andrew Stotz 27:04
So how would you summarize, you know, you've told us a few different stories, how would you summarize the key takeaways from this.

Bogumil Baranowski 27:13
So there are three things that I would highlight that I avoid, and I would recommend avoiding first too much debt, if there's too much debt, that's a red flag. And I like to understand why there's so much debt, why this business needs so much that usually the economics are not so good. The business is now growing, there are other reasons. Second thing is I really pay attention to how the management communicates with me. I read transcripts, but I often just pull up and listen to how they say things. When you read a transcript, it's just kind of a single dimension. But if you actually hear to how they say things, and if you can meet them in person, that's even better. But if you can just see how they deliver the message can tell you a lot. And then if you look at the consistency of what they say I met a lot of management's that always under promise and over deliver. And I have a lot of respect for them. And Buffett is a great example, he keeps on telling us how he's not going to do as well as he did before. And the last part that I highlighted is the secular decline. If you're a value investor, if you're looking for a bargain, and when I say bargain doesn't mean it's a low multiple stock, it's just you're buying it at a perceived discount to what you think it's worse than I would be very careful with a secular decline. And why, especially now that the lifespan of a company these days is much shorter than ever before. So companies used to belong to the 500 largest companies for decades, 50 years ago, I think was 50 years or 40 years, they would be in at the top. And now that time is shrinking to under 10 years. So the companies, on average belong to the top 500 for nine or 10 years. So when you have an investment, and you're thinking about even the three, five years, you might be catching a really good, interesting story, but towards the end of its life, or past its peak, right. And I think it's very important to not get caught in the sense that you assume that this business will grow at high single digits when it's going into a space and time in its life that it's going to grow at low single digits, can you still make money. And that's something to keep in mind secure decline. And eventually I've seen so many businesses that they go to zero in terms of growth, and there is no growth. And if one there is no growth, there are some bad acquisitions that follow and more debt, all three flags at the same time.

Andrew Stotz 29:27
So maybe I'll share a few things about you know, your story and what I'm thinking about. The first thing is that, you know, what you're identifying is three obstacles that if you can remove them from in front of you, chances are you're going to have a better chance of getting from point A to point B and the first one the debt one. I always basically teach it this is really the number one risk. And the reason why it's the number one risk, particularly for an existing company, let's say maybe in a startup situation, it's a little bit different. But for an existing company, the problem is that when you have too much debt, the business can be simply taken away from you. Not yours anymore, it's gone. And a great example of that is during the COVID crisis, if you're a small or mid sized business that had a lot of debt, it's possible that the banks shut you down. You know, you can't make that payment, they have rights over your business. And reasonable our business coffee works survive, you know, 25 years, and then came. And we sell to hotels, coffee shops, restaurants. And then all of a sudden, we went from 40 million tourists a year in Thailand to 2 million during COVID. And our business collapsed by 80%. Now, on our worst month, we had three months in those years, where we had an 80% decline in revenue. And we had to do everything we couldn't, we had a fixed asset base that we had to, you know, we couldn't just get rid of, we also had clients that are global restaurants that require that we had, you know, quick response time across the whole country of Thailand. So you can just shut down your service network. So you're in a very difficult situation where you, your revenues collapse, and you can't cut your costs as fast and as hard as you want. If we had gone into that with a lot of debt, we probably would have just lost the business, because we couldn't service that, you know, but we went into it without a lot of debt. And we ended up being able to manage through it because of that. And when we look at the payments that were due from suppliers, and you know, all the different things that we had to manage during those nearly three years of pain, what it came down to, is the fact that okay, we had we had debt, and it did grow over that time, there's no way you can get through it without getting outsourced outside funding from yourself, or from other shareholders or from banks or other sources. But we also knew that that's the bill you have to pay, because that's the one that can shut you down. And so

Bogumil Baranowski 32:09
you were in a position to raise money in the middle of it all. Yeah, that's where you

Andrew Stotz 32:15
want to be. And so what the key is, is that you want to run with the minimal amount of debt. And as I teach in my valuation masterclass, I basically say that, you know, in finance theory, we say that you add more debt, it's low cost, it reduces your weighted average cost of capital. And if you can use your weighted average cost of capital, you're increasing the value of your business. So go to the lowest, the most amount of debt that you can get, that brings down your weighted average cost of capital, that also takes into consideration the cost of bankruptcy, you know, we know that the cost of equity and the cost of debt can rise as you get into more. So when you look at that, I say to students that, you know, that, basically, you could go with zero debt. And you could go all the way I would say, 40%, of your asset of your of your capital structure in debt is probably the maximum according to the weighted average cost of capital and all of that theory. But we also have to remember that that's all theory. But I said that, so but you never want to be that close, because you could be pushed over the edge with a crisis. So let's back off of that 40% And say, come back to I would say, Be conservative and come back to 20%. And now look at a range between zero and 20%, as the amount of debt that you would bring into your capital structure, knowing in the real world when times get tough, you could be pushed beyond that 20%. But also don't don't miss the stories like ours, our current health minister here in Thailand has a business and he had a family business. And I went to see him and you know, talk to him about how he had accumulated so much cash in his balance sheet. And he had been through the 97 crisis, they almost lost their business. And he said, I'm never taking on debt again. So he has 20% of his assets in cash. And everybody's like, this is a poor use of cash, he doesn't have any debt. And he's piling up his cash. But he told me about the case of a supplier that came to him, and they're building buildings, and the supplier provided escalators. And the supplier said, Look, I need you to pay me in 30 days, not 90 days, because I'm struggling myself. And he said, I can pay you today. Just reduce the price. And the suppliers. I'm happy to reduce the price if you could pay me today. And so we can see number one, you get some gross margin benefit, profit margin benefit of having the flexibility of not having a lot of debt and having a lot of cash. And then the second thing is that when acquisitions come along, and you got the cash, you can move fast and his competitors couldn't. And so those are advantages of having a lot of cash that many people don't think about. So in real life in the world of finance that we studied and that we teach each and all that we have great theories and all that, in fact, I was just recently calculating equity risk premium of company countries around the world trying to provide something for my students. And after many hours of working on it with one of my colleagues, I just said, No, let's trash this, I don't even want to talk about equity risk premium, there is simply no foundational basis that you can actually calculate a usable equity risk premium. It just doesn't exist. And that's where we have to remember that much of finance is its art, its hypotheses, its theories, you know, it's those types of things, and it's not solid. So that is the debt issue, I think is like the key one that I would focus on to take away. And the last one, I would just say, is something that you mentioned, and I'll put it in my mom's terms, which is, just because it's cheap, doesn't mean you have to buy it, anything you would add.

Bogumil Baranowski 35:55
Well, I like the flip side of that, which is cash. And you and I talked about it on my podcast. So in theory, at least, we should be efficient. And when people look at a portfolio, they assume that, for example, the portfolio of stocks should be all in stocks and nothing in cash because you should participate in the market. And then when you look at business, so many businesses are asked when they start piling up cash, what are you going to do with the cash? I've heard it so many times, pay as a special dividend, do a buyback no matter what the price is? Do you want? Do you want to buy something? It's as if that cash was burning a hole in their pocket. And that cash comes in handy in time say, you mentioned real crisis. And not long ago, you had the COVID pandemic. And we had a lot of industries that were asking the government for help. And without pointing anybody out. But there are some industries that are cyclical, and go through this over and over again. And when you look at their record, you and I talked about it, how they spent on dividends and buybacks as much in the previous three years, as they asked the government to give them when the pandemic hit, and I'm thinking you had the money had you just kept the money, you would have that money when the pandemic happened, you wouldn't need to ask anybody for help. But the shareholders and that common knowledge out there is to if you have the cash, then go spend it. Nobody's asking what would you do if you really need it. And I think that's the other side of it, a company that can actually hold on to cash and be ready and survive and flourish in a time like this, either. Because they can get a better deal from a supplier or acquire businesses, I think it's a brilliant way to put it.

Andrew Stotz 37:36
Yeah, then you got big business and big government collusion, which is another topic for another day. So based on what you learn from this story, and what you continue to learn, let's think about our young listeners here. And what one action would you recommend our listeners take to avoid suffering the same fate?

Bogumil Baranowski 37:53
Oh, boy, I would pay attention. You know, just pay attention and ask the right questions. And I actually recently wrote a piece about the quality of questions that we ask, I think, just take the time to get to know the story. And it's my personal choice, but start with the worst thing that can happen. I have interns now that work with me. And they always come to me with how they can double how we can double or triple the money in the idea. And I tell them, I'm all excited about that. But show me how I can lose money. And they look at me for a second and then they get it. So start with how you can lose money on that idea. And then let's get excited about why we can make money in it. I think it's a great way to start. That's why where I like to start.

Andrew Stotz 38:34
Great. And what's the resource of yours or any other resource that you'd recommend for our listeners?

Bogumil Baranowski 38:41
There's so many books. And if you look up my books at the end of the book, I'm actually mentioned quite a few books that I found really interesting if somebody's new to investing one up on Wall Street by Peter Lynch is an amazing book. And then if you are more you know a little bit than any book about Buffett is fantastic. You have so many resources about valuations if people are curious, so you can probably chime in. But the list is endless. But I would start with just understanding how Buffett made it, how he picks that and businesses I think he's really unique and he's been doing it for so long through so much change from you know, a textile company that he acquired all the way to buying Apple when you think about it's the same person that bought a failing textile business in the Northeast all the way to owning Apple share. So I think there's a lot that you can learn or pick up any of his letters. I think there's so much to learn. And it's not only technical I like what Buffett wrote in the introduction to Ben Graham's Ben Graham being the father of value investing through his book intelligent investing, he wrote, The book provides everything except for the emotional discipline. I think that's something that you it's good to develop and, you know, start small when the mistakes are not as expensive and then keep on growing from there. but keep the downside in mind.

Andrew Stotz 40:03
Yeah, one lesson from Buffett is stay in the game. He stayed in survive for, you know, what, 7080 years. And the compounding is amazing at this point. All right. Last question. What's your number one goal for the next 12 months,

Bogumil Baranowski 40:18
I've been having so much fun with my podcasting adventure as you have. And I've been launching an episode every week. So my goal is to maintain for the next 12 months, a weekly episode. And you and I know that some time goes into this and preparation. I'm learning a lot. I'm meeting interesting people, I'm spending more time with friends and friends of friends. And I'm picking up rereading books, authors that I knew before. So my goal is to keep it for at least 12 months. I know you're way ahead of me, I don't know how many hundreds of people you talk to. So if I can get to the first 100 I'll be happy. So that's my goal. Well, I

Andrew Stotz 40:55
mean, you're, you've got a different premise, and you're a different person, and you pursue it in a different way. And so I think you're, there's no such thing is ahead or behind, you know, you are right. And you're enjoying the process. And that's what's the key. Right and I'm loving it. That's beautiful, 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're not yet join that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life. As we conclude, Bogle mill, 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?

Bogumil Baranowski 41:48
Have fun with it. Investing is fun, so have fun with it. Happy investing. That's how I add all my articles Happy investing to everyone.

Andrew Stotz 41:54
Beautiful. And that's a wrap on another great story to help us create, grow and protect our wealth 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.