Andrew Stotz 00:01
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, but to win big, of course, you've got to reduce it, ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, all kinds of risks, not just investment risks. And I want to thank you for joining this mission today, especially our listeners in North Carolina, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Tony martinetti. Tony, are you ready to join the mission?

Speaker 1 00:42
I'm excited to join the risk reduction mission. Absolutely. Thank you for having me. Andrew, yeah, well,

Andrew Stotz 00:49
I'm excited to have you on because, you know, you you come in coming from a very different angle than some of our guests, and I'm interested to learn more about what you're doing, including learning a little bit about, you know, as you and I were just talking about about your upcoming project that is getting ready to get done. So let me introduce you to the audience. Tony is the evangelist for Planned Giving, fundraising for small and mid sized nonprofits. And you can connect with him right there on LinkedIn. Just I'll put a link in the show notes, but you can just type in his name, Tony, and his last name, M, a, r, t, I, g, n, e, t, t i. So Tony, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Speaker 1 01:34
Well, thank you again for having me, Andrew. This is great fun. I've never been on a worst investment podcast before I'm usually, I'm usually talking to nonprofit audiences. So this is great fun. My value. I bring a different perspective to what you introduced me as my work in planned giving fundraising. I say it so deliberately, because a lot of people think it's plan, giving. And then, you know, your audience might think that's an investment plan, or it's a condominium plan. I'm, you know, I'm a real estate developer, no planned giving, fundraising. It's raising money for nonprofits. All my clients are nonprofit charitable organizations in the United States, and I'm introducing their donors to a method of giving to the charity that is through their will, or their life insurance plan, or life insurance policy, or an IRA pension plan, charitable trusts, charitable annuities. Give through your Give. Give directly to you through a qualified charitable distribution for your IRA, all these long term methods of giving and giving to and supporting nonprofits.

Andrew Stotz 02:52
And so there's two aspects that I'm thinking about as I was listening to you. You know, the first aspect is there are givers, people who have excess funds and want to, you know, share those funds with organizations that are fulfilling a mission that they believe in. And then there's those organizations that are driven by not, not necessarily the person who's accumulated money and is a giver, but by a person who has accumulated a passion and an excitement about a particular thing. For instance, there's an organization in Thailand, in Bangkok, called soy dogs. Soy meaning street, or, like, small street. And, you know, there's a, there's a huge need for taking care of these dogs that are in, you know, really terrible shape. So they need to raise funding. And, you know, it's a pain in the butt, and, you know, it's so I just think about the there's, there's people that are on a mission, and then there's people that have funding that they want to, you know, contribute. Am I? Am I framing it right? Or, how do you see this, this, or, you know, the industry of the nonprofit.

Speaker 1 04:01
Now, you're right. There are nonprofits doing great, important social change work, like soy dogs and you know that. So that's grassroots animal welfare, right? Animal assistance. I mean, there's religion, education, healthcare, the environment. Domestic Violence, children, all the different medical causes, 1000s of medical cause. So all this important social good work, and thankfully, the United States, people in the US are very generous. We're the most philanthropic country in the world. And putting those two together is the work that I do, and it's just that my work is fundraising for the long term, like a good example. The easiest example is a gift in someone's will. When you put a charity in your will that's not cash to the nonprofit. And. Till you've died. So it's long term fundraising, but you're exactly right, matching generous people with important causes

Andrew Stotz 05:09
and why? Why does someone like you exist? Because sometimes you could think, Okay, well, those people that have money, they're looking around, and the people who are running these organizations, they're always looking for funding. But yet, I'm sure for many different reasons, they don't connect in the way that you help them connect. Why is it that you exist in this, you know, ecosystem?

Speaker 1 05:31
That's a pretty big existential question, why? Why do I exist? Why do I exist? All right, we could take that in a lot of different levels. We'll stick with it the way you stick with it the way you asked it. Yeah, you know, you have your own business, multiple businesses. You know, you don't just build a business and people come to it. You have to promote the business. You have to bring people to it. It's the same as a nonprofit. These are the way I look at it. These are businesses. They just happen to be in a tax status in the US, which is designated as nonprofit, so that people get charitable income tax deductions when they make gifts to these important causes. That, though it's a tax status, but it's a business, and you have to bring people to your nonprofit business, attract them to your cause, and encourage them, not only to, you know, follow you on Instagram and connect on LinkedIn with your cause, but also they need donors and volunteers, and so those that's part of the reason I exist is to promote the idea of giving to the causes that hire me to help them,

Andrew Stotz 06:41
and what is the ideal you know, person in this situation, let's say someone who has something that you know, they've got a huge demand. They want to expand what they're doing, but maybe they don't either have time or skill or knowledge to reach that long term audience, and so they just never are able to really fund the stuff that they're doing. Like, what is the perfect type of client for you?

Speaker 1 07:12
It's a smaller, mid size nonprofit, and I don't put a budget number on that, or number of employees, or annual revenue, or just small, mid size. So you know, we're not talking about the biggest five or 10% of the charities in the United States. Probably more like 5% for but for the other 95% that are not doing planned giving fundraising. So they have immediate fundraising, of course, because they have to keep the lights on. They got to keep salaries paid. They got to fund the five year technology plan, etc. So they have immediate and maybe even midterm giving, but they don't have long term giving. And the type of that's the type of fundraising that I do, it enhances their sustainability, so that they have cash flow coming in future decades. Now we don't know when, because it's the fundraising I do, as I gave the example before, is based on when people die, but when you have a cadre of folks who have made that type of commitment, that type of long term commitment. You know, the reality is, some folks are going to die in some years, and some folks are going to die in other years, and there can be a while not predictable. There can be a fairly steady stream of fundraising revenue that comes from these, these long term commitments. I mean,

Andrew Stotz 08:40
it sounds like it's an area that that fundraising, you know, that that nonprofit just never is going to really think about, because they just probably focus on the operating costs and, you know, talking to people to get funding, but to, you know, it's like you've got a niche that you understand what it is, what the opportunity is, how to structure it in such a way that it's super clear for that person to say, I want to, you know, I want to put in my will as an example, some contribution to this. And it's like, just to me, it seems like it's an area that just, you know, they're never going to really put together. So, like, you can instantly come to them and go, here is a segment of funding you're probably not thinking about. You probably not really have the time or the energy or the knowledge to access, but through me working with you, I can help you access that, and that's going to provide, you know, the long term funding that you need to be able to really support the long term growth that you have. So that's the way I see it. Am I? Am I right with that? Am I? What do you think?

Speaker 1 09:41
Are you interested in a second gig as a sales, business development representative, doing my best because that, yeah, you framed it perfectly. I'm not even gonna, I'm not even gonna tweak it.

Andrew Stotz 09:53
No, no. So for those people that are listening to either have nonprofit or that know someone that's, you know, got a mission and they're excited about. On it. And they're, they, you know, they're, they're covering, they're figuring out how to cover their operating costs, but they're wondering, how do I really build stability in my long term mission? And for many people, that mission can go on for many, many decades. You know, I think that's interesting. And as we've talked about when I introduced you, you can just reach out, I have a link in the show notes to Tony's LinkedIn and learn more. So now it's time to show your worst investment ever. And since no one goes into their worst investment thinking it will be, tell us a bit about the circumstance leading up to and then tell us your story. All right.

Speaker 1 10:38
Thank you very much. Andrew. I love this, this, yeah, so I've been in planned, giving, consulting, my own business, one, one person business, you're looking at the company, since 2003 so 26 years, about 24 years ago. So two years in business. I thought, you know, I would like to try to be a thought leader in this niche that I'm this is a narrow niche in planned giving, in fundraising, this narrow niche, but I'm deep in it. I thought, well, you know, I could, I would like to be a thought leader in this area, but, but I don't really want to restrict that. You know, my wisdom, all right, to just not the nonprofit community. I want to go broader. I want to encourage citizens of the United States who are not familiar with Planned Giving fundraising might not even be supporting any charity at all in any way. They might not even be writing $5 checks or $500 checks or $5,000 checks. They're not supporting nonprofits. I want to get the word out about the importance among our culture, in our nation, of supporting nonprofit causes for the long term. So now that's a that's, that's pretty big. That's a pretty big undertaking because, but this is what I was thinking. So this, I think I'll, I think I'll hold the headline, you know, I'll just what the way I see the headline, I'm gonna, you're not supposed to bury the headline, I know, but I feel like leading him to it, and then I'll share what I think comes out of this. Yeah, so I was in the New York City area. My business was in New York City, headquartered in New York City. Now we're talking about 2000 2003 four, like, four or five. Of course, we were all in offices, you know, five days a week. You know, you got to go back 26 years. So I had an office space in lower Manhattan, in New York City. Fifth Ave, if you're in, if you're in or near or or No, New York City. I was on Fifth Ave, between 22nd and 23rd streets. Eisenberg's diner was my favorite lunch place, if you know, if you know the flat iron now I'm in the flat iron neighborhood, you can see the flat iron building from the little office I had. And there was Eisenberg diner on it's still there. No but I think it changed names. They have fifth, they have between 22nd 23rd so I went to what I thought would be the perfect PR agency to help lift me up, to make me a thought leader in the nation. I'm going to be the nation's thought leader on planned giving fundraising thing and big thing and big Yeah, well, I thought there was a need. Yes? Well, and there, I thought there was so it is, I think I got a referral to, I don't remember how I got acquainted with this agency, but now we got to go uptown. We got to go into Midtown. Now we're on Sixth. Ave like in the 50s. You know, 70 story, 80 story office buildings, high rent, very high rent. District, not, not down flat iron, where my office was, where, at the time, like the biggest, tallest building was probably six or seven stories or something, or the flat iron building was like 12 stories something right now we're in Midtown now, 80 story skyscrapers with the overhead that you would imagine. And here I am one person shop, and I'm walking in and I'm interviewing, you know, I'm interviewing them. They're interviewing me. This is a PR agency, and they bring out the big binder, like, probably a three ring binder, of it's probably four inches thick, you know, the spine is four inches thick. And they flip through and all the pages, of course, are in, it's all in page protectors, so you're flipping the plastic pages. And there's, Oh, there they are on the Today Show, and oh, there's a client on 60 minutes, and there's one on Good Morning America. Oh, and there Charlie Rose introduced what interviewed one of their clients. Oh, my God. This is going to be incredible. I'm going to be on Charlie Rose. It's going to be amazing. 60 Minutes. Is going to do a profile of me and my practice and how important this is to the nation. So they sucked me in. You know, I got, I bought it all hook, line and sinker. Oh, we'll, we'll get you on. You know, you've seen the portfolio. You know, we're gonna get you on the Oprah. They were full of shit, as you might imagine, as my tone may suggest, the marketing. I bought it. I bought it, and this turned into my,

Speaker 1 15:34
my $13,500 vanity investment. Okay, this was now, here's the kind of the headline coming in, my kind of my lessons. This was an ego investment. I did it for two months because it was 6750 a month. I did it for two months, and all I got in the two months was a one time byline, like op ed that I had that I Well, of course, so I wrote it in a giveaway newspaper. There were, there were two at the time, there were two giveaway newspapers in the city of New York, down in the subways. There were two. There was, there was Metro. It was called Metro New York, and there was a New York. I got an am New York written com that are like an op ed. I wrote it. It's not like they interviewed me as a thought leader. I wrote a byline op ed, and it was given out on Martin Luther King Day, when nobody's in the subway, because it's a national federal holiday, the subway, and this is where these papers were given out am New York was given out in the subways. There was nobody in the subway. It was a federal holiday, so that the subscription, the readership, was probably, you know, 1/50 of its of what it would have been the next day on Tuesday. But they didn't offer me the Tuesday so this swanky PR agency on Midtown in Manhattan, 6750 a month, got me one placement on a giveaway newspaper on a federal holiday, and there were no leads for Good Morning America or Charlie Rose or the Today Show or 60 Minutes. There were no leads, no magazines, no newspapers. There was nothing promising coming. So I dropped it after spending $13,500 on my vanity, ego investment.

Andrew Stotz 17:32
Interesting. One question I have, you think they always had it planned like, oh, let's put them on the, you know, let's put them on that. You know, subway giveaway, this will be perfect, you know. Or did they really think they were going to get you on those but they just couldn't deliver? Or, I'm just curious, what did you think was in their heads?

Speaker 1 17:53
No, I think they what. Well, what they should have seen was a pie in the sky solo entrepreneur whose ideas are bigger than the mediascape reality, and they should have talked me down to what's reasonable to expect. Instead, they completely mismanaged my expectations, had me flipping through the binder and kept feeding my ego and vanity project so that they could capture a fee.

Andrew Stotz 18:27
And how would you describe the lessons you learned?

Speaker 1 18:33
Don't take yourself so seriously. Keep your ego in check. Maybe check with some other folks in your, in your in your field, you know, vet your ideas before you invest. I mean, that was a lot of money for me, 6750, a month. So, you know, you know, check with friends, check with people you trust, yeah, whether they're colleagues or just, well, in my case, just citizens of the US, you know. Does it sound like something that, you know? No, it was like I said, pie in the sky. I mean, I would have had to educate Americans as to the value of nonprofits, and then to the value of supporting nonprofits in the long term. You know, through methods like we talked about wills and life insurance and then, and then, you know, go find a charity. I mean, it was just there was too much. There was way too much for reality. So, yeah, yeah, that I would check, check your ideas with somebody, or some few people who you trust, yes,

Andrew Stotz 19:43
who are honest, yeah,

Speaker 1 19:45
who you trust, who is just to be honest with you? Yeah, exactly. I mean, yeah, don't go check it with the people who are going to get a fee for capitalizing on your pie in the sky idea. That's what I did, and I got no check at all on my vanity project. Yeah.

Andrew Stotz 20:00
Um, here's a couple things I was thinking about it. I mean, the first one, I'm, I'm kind of picturing, you know, a good old uncle who should have, you know, just walked you out the door. Said, this really exciting, you know, go back, rethink it, put some more time into it, and then come back when you but, you know, of course, that's not going to happen in the business world, because you're sending $6,000 out the door. And why do that? But the other thing, I think it happens for everybody. When we start a business like we just really get that entrepreneurial seizure. As Mike Gerber said in his book E Myth, he talks about, you just get so excited about your idea you can't talk people, you know, even if you went to your friend and your honest friend who told you this honest opinion, you know, this is where it's kind of, the advice I sometimes give in this type of situation is, go do it. I mean, it's so hard to break through. And if someone's listening or viewing this, and they're in that entrepreneurial seizure. I mean, this is a chance to break free from it a bit, but, you know, it may be that they have to do it so that's one of the things that I was thinking about. And then I remember, there's two things that I did similar, you know, when I started my own business. And the first one is that I had just finished my PhD in China. And so I was back and forth between China and Thailand. And so, you know, I had a lot of connections. I had built up. And so I thought, you know, let's do social media in China. It's big. Build out my presence. And, you know, all that. And I paid a guy. And, you know, in his case, he delivered. He delivered, you know, he did a pretty good job. It wasn't, it wasn't cheap. And then I had another case where I was like, okay, you know, I used to go on TV shows a lot like CNBC and all that to talk about the markets when I worked for big investment banks. So I thought, do that same thing. And so, you know, I had some other organization that got me on some of those, and then, but then I realized there's just one thing that even if you're successful in getting on the shows and all that PR does not equate to business to revenue to customers. So even if you think, well, that's not gonna happen to me and my PR guys are good. Sorry. PR rarely connects with revenue and expanding your business. Occasionally it does. And when it's done, really focused and really right, it can so PR won't save you in most cases, even if you got it right,

Speaker 1 22:34
absolutely true. Yeah, my experience as well, because later on, probably three years later or so, I met a freelance PR guy, and he delivered for me. I got some quotes in the New York Times. I got quotes in the Chronicle of Philanthropy, which is a respected then it was print, you know, of course, but still now that now the digital, but respected publication in the nonprofit sector, Wall Street Journal. He also got me some Wall Street Journal quotes placements. I had a very good relationship with the times and the and the journal reporters on the nonprofit beat, so they would call on me from time to time. But even with that, you know, I never saw Never did I pick up the phone or get an email. I saw you in the times. You know, let's talk about the nonprofit that I'm on the board of. I think they could use some help in planned giving fundraising. It doesn't equate it's rare, like you said, it's rare. It's more for reputation, you know, awareness more of a long term, long term play.

Andrew Stotz 23:47
There's what the remnants of, what remain in my brain from my Latin class in high school, is Caveat emptor, fire beware, which my mom used to say. I remember, you know, she also used to say, just because it's discounted or cheap doesn't mean you have to buy it, which was really annoying. You know, luckily I get to, I get to say that to my mom now, as she's turning 88 but the other thing I was singing in is the great saying, a fool and his money are easily parted. You know, when we are so excited about our ideas, we're foolish. You know, are we a fool? Probably not, but we can be foolish. And if we can separate that kind of foolish time where we have these big dreams from, you know, we're not fools, but we can be foolish at times, it can help us. Let's go back in time now. Let's think about that young man or woman today, they're they're doing this right now, and they're listening, and they're like, Hmm, so based on what you learned from this story, and what you continue to learn, what's one action that you'd recommend our listeners take to avoid suffering the same fate?

Speaker 1 24:57
I would say, you know, check your ideas. I. And you look, you know, you might get the same, the same advice that Andrew just said, which go do it, you know, if I, if I, if you're, if your mentors and your advisors or your friends think it's a great idea. I mean informed, informed friends, if they think it's a crummy idea, is what I mean, if they think it's a crummy idea, and, you know, you can't be talked out of it, then I would say, Take Andrew's advice and go do it. But I would say, you know, check your ideas. I mean, is this an ego project? Is this really going to build the business? I mean, here I was just a couple years in business. I'm still in the growth business development phase. You know, PR was not the way to go about that at that stage in my business. Yeah, that's great advice.

Andrew Stotz 25:49
And what is a resource, either of yours or any others that you'd recommend for our listeners?

Speaker 1 25:56
Well, if you are acquainted with a nonprofit, if you are on a board of a nonprofit and small and midsize, and you know that they are not engaged in the long term fundraising, planned, giving, fundraising that I do, I'd be grateful if you'd check out my work at Tony martinetti.com connect with me on LinkedIn. Otherwise my advice is, check your ego.

Andrew Stotz 26:24
Yep, that's good. I am a member of CFA Institute, Chartered Financial Analysts, and was also president of the CFA society here in Thailand. And I want to share this with them in that in our little group that we have all of our members, because, you know, they're involved, they're they're, they have clients that have this need. So I think for those that are listening and thinking about it, that your CFA charter holder, certainly, you probably have clients that are happy to figure out ways to give so check it out. All right. Last question, what is your number one goal for the next 12 months?

Speaker 1 27:04
Publish my book in September. I'm publishing a book called planned, giving accelerated. It's coming out in September. So I'm, I'm, I'm excited to do that. It's my first book. I'm self publishing. I've got a great talk about check your ego, and, you know, having somebody to rely on. I've got a great mentor who used to publish books in the nonprofit community. He retired his publishing house. But I've got a great mentor who I'm very grateful to, Steve, and that's, that's what's got me energized for the whole year, finishing the book and promoting the book. And then there's a course that will also follow on to the book.

Andrew Stotz 27:45
Wonderful. Well, I hope that we can get you back when you have published it, and we can maybe go through some of the tips, the chapter summaries, or some ideas that you can get from it. And then I'd love to have you back on, oh, thank you. I'd be honored.

27:59
Thank you very much. Andrew, yeah, I'm going to take you up on that. Sure.

Andrew Stotz 28:02
Looking forward to it all right. Well, as we conclude, Tony, 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?

Speaker 1 28:19
I'll just say thank you very much, Andrew, this was great, great fun. You know, it's very different than what I've done.

Andrew Stotz 28:24
Thanks so much. Yep, 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 will see you on the upside. You.

Andrew Stotz 00:02
What is the biggest investment mistake that everyone is making right now? Hello, risk takers, this is your worst podcast host Andrew Stotz, and today I have a guest coming back for the third time, fourth time. Sorry. David Siegel is coming up. You can hear his episode on episode 89 episode 644, and episode 816, now, David is a Silicon Valley entrepreneur who has founded more than a dozen companies, and he's written five books on technology and business, and it was once a candidate for the dean of Stanford Business School, and is now an AI thought leader, leading an AI startup he hopes will pave the way for the agentic economy. David, take it away.

David Siegel 00:45
Great to see you. Good morning. Andrew, good morning to the rest of the world, wherever you are. I want to start with health because some of your viewers know that I'm a longevity coach, and I'm leading an online fast event for anyone who wants to fast for three to six days, and this will be in April. We're going to start the fast on Monday, the 20th of April, but the coaching, the preliminary session, information session, is going to be on the 12th of April. And you can put a link to that in the show notes. You can reserve your place on Zoom, it's free. It's free, and you can take it as long as you want. Or a short it's there's no obligations, it's just information.

Andrew Stotz 01:28
Two questions I have on that, how do you define fast? What is it that you're actually doing?

David Siegel 01:34
It's for whoever can anybody. Can do anything he wants. But I'm generally proposing a water fast, okay, for three to six days, depending on your situation. We'll be talking about that on the 12th on the strategy meeting, okay?

Andrew Stotz 01:49
And then the second question is, what you know I've done water fasts myself, and I really, really think that they're incredible, and I can see some real benefits, as I've done them over the years. But what would I get, or anybody get by joining this would it's going to make it easier, I hope, and it's going to make it more fun, or

David Siegel 02:09
fun to do it in a group, right? And a water a fast is not a diet or a way to lose weight. It's a reset, right? It's kind of an event for your body to have a chance to go into ketosis and to clean house. It's not something you want to do once a month. It's not something you know, I do it about three, four times a year. I don't know how often you do it. You just want to generally have your healthy lifestyle that works. And then wherever you are in your health journey, you can have a reset for three, four or five days, and it just really energizes you and kind of turns things on that are normally suppressed.

Andrew Stotz 02:51
So ladies and gentlemen, just go to the link. I'll have it in the show notes, and you'll see me in there because I'm joining and I will be on that fast. So let's do it

David Siegel 03:01
on your let's do it on your mind. David, it might be the middle of the night for you.

Andrew Stotz 03:08
I'll be signed in. Let's see. Okay, we'll see.

David Siegel 03:13
Let's talk. Last time we spoke, we spoke about the emerging phenomenon of llms and AI, right? And I have a whole course on AI that I'm sure you'll put a link into, and some people have seen, and it's about, what are llms, and what, how do they work, and what are the implications for society? And now today, we're just going to dial into one particular area of let's call it the future, and that's the agent the beginning of the agentic economy. Because if we go forward, as I have written about many times, say in 20 years, we won't be shopping on Amazon or going online to, you know, there won't be any advertising and marketing for humans, you know what I call you'll probably appreciate this, the Cialdini mind tricks of getting people to buy with urgency and storytelling and all, you know, Russell Brunson stuff and funnels, all that will go away in 20 years, because it will just be machine to machine as it is. For example, in the stock market. Did you know that the New York Stock Exchange? 60 plus percent of all trades on the New York Stock Exchange are open and closed in less than one second? Yeah? About 60, about 65% so that's all machine to machine, yeah. So that's so in fact, in 20 some years, you won't even be allowed to drive your car on the road, because you'll be too dangerous. You won't be able to communicate at the frequency that machines do and in the language machines do. But for right now, for this awkward period in human history where humans have to deal with machines, and machines annoyingly have to deal with humans, you know it's like this. Really, nobody likes it, but we are doing it because it's taking us someplace that we do want to be. We want to get to a better life where most of the Drudge work and grunt work is done by automatically.

Andrew Stotz 05:16
Yeah, and you know, I was going to say that recently, I've been thinking I've got to get an additional assistant to help me, you know, with my workload. And I thought to myself, well, I'm looking forward to this call, because it, you know, I think if I can find a way, you know, and I would say I'm, I'm not super satisfied with my level of application of, you know, I basically use, you know, four different AI tools, but I'm not they're not automated, and I'm not impressed when I try to automate them, because they come up with stupid things. And I just had them do something with a prompt that I had perfected a long time ago. I reran that prompt and the crap that it set out. I had to do it all myself, so I'm interested. And I think for listeners and viewers out there, this is, you know, something that is there a way that we can, you know, really, you know, bridge that gap. So I'm listening

David Siegel 06:14
all right. So this is going to be show and tell. Yes, I want to talk and show what's going on in the agent world right now, everybody's heard of open claw, so we're going there, and we'll start there. Okay, and

Andrew Stotz 06:29
that's the CLA,

David Siegel 06:31
open claw. Open, yeah, open, O, P, E, N, C, l, a, W, it's the claw refers to lobsters, which comes from a forward thinking book about the future that was written years ago, a fiction book, and the claw means agent. Okay, so your lobster is your agent. Agents and claws are this, and lobster is all the same thing. And this is what open claw looks like. It's free software. Anybody can download it. It's been downloaded probably millions of times, and it's very techy, and it's all about configuring to API. So what it does, what openclaw did, and this came out, I think, 48 days ago now, by Peter Steinberger on GitHub, it connects llms to API's. That's what a multi agent framework or harness does. Okay? It connects llms, which are the thinking things, to API's, which are the doing conduit. So let them, you know, call an Uber or order a meal or do some shopping or buy something, or, you know, run ads, or run, run, and we're going to see many examples of those. So it lets the LLM take action, all right? And eventually, you can imagine that that's what robots will do, right? So robots are effectively agents, and you'll hook the LLM to the capabilities of the robot. But today, we're just going to stick with agents. And this is a very techy look at what OpenClaw really is. It's full of

Andrew Stotz 08:09
and before we go there, just out of curiosity, if I just open up OpenClaw on my website, as I'm sure people who are watching and listening would do, and I don't see actually a place to sign up. I see a place where it says, Subscribe, stay in the loop, or other things. Is there something I'm missing here?

David Siegel 08:26
It's not for humans to do. I mean, it's for very geeky people. And we're gonna wave you off. I don't even want to tell you where to download it. Okay, got it keep going because that will just take you on a trip that will be end in tears. Okay? Because, as I'm showing you, it's very difficult. And so here, let me just show you some aspects of the agentic economy, or what's happening with agents. One of the things we want to do is hook our agents up to email so we can just talk to them by email, and we can send an email request and say, you know, I don't know, send a, send an interesting email to all my friends this morning, or tell them I'm or the all the people that I'm going to this event with, I'm sick and I won't be able to make it. You know, these kinds of what a personal assistant would do, right? And so email is one thing, and we want to hook it up to Gmail, because that gives us access to sheets and Docs and stuff, but the Gmail Terms of Service don't really like API use, and so that could end up getting closed down by Google. Right now, it isn't so some guys, some entrepreneurs who went through Y Combinator just launched agent mail, which is Agent friendly. It's an email service that you can use to hook up your agent, and it's not going to get shut down, and it's going to have more and more capability. Now I want to show you a crazy one called pulsia. Pulsia.com is AI slop backwards, pulsia. And this is, this is a company. In a box. And so when you get there, it says, what kind of company do you want to make? Or it says, surprise me. So I clicked, surprise me, and it somehow figured out who I was, I guess by my IP address and some other stuff that probably it shouldn't know, figures all out everything about me and decides it's going to build a privacy preserving personal data locker, which is what my last book was about. It figured that out so, so it just did it. This is one click, right? This is one shot. I said, surprised me. Figured out who I was, and did a whole dug up a whole bio on me, figured out my books, and said, Okay, fine, we're going to launch this thing called own word. It just made up. The name own dot word. I don't even know if you know dot word isn't even a domain, you know, high level domain. It's just all made up. Okay? And then it says, your digital life runs itself autonomous. AI agent, the managers your account, subscriptions, data communications. It's an employee that works while you sleep. The problem you have 100 accounts, 12 subscriptions, no control. So it goes Watch Dogs, subscription control, which is a really good use case for agents, because who knows how many subscriptions we have and the ones that we need to get rid of, we don't even remember, right? Manages your own data communication. So it could just do things for you and answer, answer your emails for you that you don't care to answer. It'll just get it right and answer the emails and you don't even see them. This is another good use case. So this is before and after, and then this is the future. Isn't more apps, it's one agent that replaces all the apps, something I've written before. And so it just and it's put together this dashboard of all the different things that it has to do, and it will tweet about it, and it is already sent me several emails. It's very excited to get going, and this, all it needs is $49 a month, and it will put a team of agents to work building this business. And I don't do the marketing, I don't do I don't do anything I can just watch, right all and it will all I have to do is pour a little money in, for example, to listen to x feed, is $100 a month, and then to post, and then to maybe run some ads on Facebook or social. Just give it some money and it'll go out and get the traffic and bring them to this thing and have them sign up and deliver the service, right? So you don't have so there's hands off, right? So that's you probably heard of vibe coding. That's another kind of agent. Now, this is the,

Andrew Stotz 12:39
by the way, by the way, what does it when you say agent, what does that mean?

David Siegel 12:45
So an LLM or an AI? Well, LLM is what we mostly use. It's really like is, is going to talk back to you and type to you, and can make some images or make a video, but it doesn't really do anything outside of our interaction. It doesn't interact with the rest of the world. It's so when it can send an email to someone or post somewhere, it has access to another system. And so when you give it access to something, it can do, that's what an agent does, okay? So it can take actions. Okay? Oh, you know, making a video is also an action, right? So, so it's more like these interactions via systems, the way I think of it, Andrew is it's pretty much everything that a human, virtual assistant could do from far away. Yep, remote with a keyboard, a mouse and a screen. You get me excited. David, keep going. Yeah, so their job is to do things on your behalf while you sleep. And we're going to show a couple agents now. This is the one that we sell. It's called Byron. And our company is called redshift labs, and I've shown you this before. I'm going to make it real fast, because this is a sales agent, and I want you to listen to what he's doing. He's selling. He is working for this company, pro mix, which is a huge supplement company. They have tons of traffic. And we're going to talk to Byron now. And this should go into your recording, I think. Byron, are you there?

14:26
Hello there. Loud and clear and ready to help. Great.

David Siegel 14:28
I'm here with my friend Andrew, and we just want to show why don't you show us some of these protein puff bars that you've got?

Speaker 1 14:36
Absolutely Andrew and friend, let me pull those up for

David Siegel 14:40
you. He always forgets my name. My name is David. Remember.

14:43
Ah, David, my apologies.

David Siegel 14:46
Alright, let me see the protein puff bars. Quick.

Speaker 1 14:50
You're looking now at the protein puff bars variety pack.

Andrew Stotz 14:53
Okay, so it's gone to that page.

David Siegel 14:56
Yes, right now. Now? What? What's your question?

Speaker 1 15:00
Byron David, since these bars have such a clean ingredient list with grass fed whey, coconut oil and tapioca, are you looking for something simple and minimal, or would you want to know more about how that combination affects the taste?

David Siegel 15:16
Do potaine Pour Vic

David Siegel 15:39
show me I'm saying, there we go. So this is protein mix. Let me see the grass fed way. He speaks 200 languages fluently. He was speaking he was speaking Chinese to someone today earlier.

Andrew Stotz 15:52
That's incredible. Can he hear me now?

15:56
Absolutely, I can hear you loud and clear. Combat.

Andrew Stotz 16:00
Run put, Passat, high Passat, high diamond.

Andrew Stotz 16:14
That's great. So he

David Siegel 16:15
speaks Thai. He speaks everything. His Yiddish is terrific. Okay, okay, let's see the grass fed way Byron show me that.

David Siegel 16:30
All right. This is way isolate strawberry milk. I see you've got other flavors. Let me just ask you something. This is expensive stuff, $61 why don't I go to Amazon and just get it for less money.

Speaker 1 16:42
I get it that price point. Can raise an eyebrow. What makes this special is it's truly grass fed micro filtered for purity, with no junk fillers, and you get our money back guarantee. So you're investing in quality and peace of mind. What would make you hesitant to give it a try

David Siegel 16:59
right now, if I bought this, I'd have this big bag of powder in my kitchen. What would I use to manage that?

Speaker 1 17:06
That's a great point. No one likes a messy kitchen. We've got some really handy countertop storage container. Let me see.

David Siegel 17:19
All right, so that's just quick. That's Byron. You can see him in action at redshift labs.io. I want to just show you this, because he's a sales agent. He works for the company, right? He's always asking you questions, drilling into your problem, asking you whether that would be, you know, how much would you like? Here's our guarantee, you know, defending against objections, right?

Andrew Stotz 17:43
Maybe I should have him on my valuation masterclass.com website. Absolutely.

David Siegel 17:48
He's there to represent the company and maximize your the company's revenues and build relationships, right? That's what his prompt is for. Now I'm going to show you another we're going to go to another world right now, and that is the world of perplexity.ai. Perplexity has an agent. It's in the comet browser, and it's called perplexity computer. You might have heard of that. This is another agent system, and this is just some stuff coming in. It's actually interacting with my partner, Alan. And this is another email I have. I've got my agent has two email addresses, and this is the Gmail version, and it's been working with me. This my agent. His name is Leo. Doesn't matter what platform my name, my agent is always named Leo. You should choose a name that you like, that you know. You don't know anybody who has that name, so that's not confused. Here's his little logo, and I've been working with him to send out emails to people who might be interested in having their own AI agent, because that's what we do. We have a company called claw studio, where we install this open source software and make it white glove turnkey, easy for people to have their agents. I'll talk a bit about that in a minute, but I've been sending out. I had him send out 243 emails. But the trick was I gave him a set of email addresses I had on a list, and it goes and researches each person, every individual person, finding out what's unique or interesting about that person, and then mentions something in the email about, hey, congratulations on this, or whatever your you know your latest thing is, so it catches their eye and gives them a subject line that is pertinent to each person. And then he opens this spreadsheet, and then he puts an X, I didn't put this X. He put the X here to show that he did each one right, and then, and so he's doing it right. And then he also has written things with me, but they all can write, so that's not particularly important. This now is going to be something interesting Andrew, where I'm going to show you what a different there's two different ways of interacting with the web. One of them is what I just showed with where I could have I could ask him to show me all the emails, and I could dictate what I want him to do. And here he's on a website Amazon, and I'm going to ask him, and he's going to manipulate the website, just like you saw. But he's my agent. He's a buyer's agent, so he's looking out for me, and we've already had a conversation about different lights. I want to order for my studio here, and I want to ask you, can you show me the shopping cart please? Right now, this is running the model Claude sonnet four right now it's set to best, but I have it using claudeson at 4.6 and I'm asked it to show me the cart, shopping cart. Now notice it doesn't know anything about Amazon. It scrapes the page and learns and figures out, and it can fill out forms, and it does it all just by sort of feeling its way along the website. And nothing is pre programmed. There's no Amazon API, right? It can look at any web page, and then it can get to a point where it says, Show me prove that you're not a bot, right? I'm not a bot. Get to a cap capture, and it can hire another service that will do that for it and blow through that. No problem. I'm going to show you a first that you haven't seen and that very few people in the world have ever seen, because it's one of the first times anyone is doing it, I have given it access to my account here, and that means it could spend my credit card down and spend 1000s of dollars right now, if it wanted to, but we don't want it to do that. I'm going to check out. I've got an extra wide grip for my dumbbells, and I've got a light that I want for my studio. So let's try it and see whether it makes a mistake, whether it spends 1000s of dollars of my money, or whether it actually checks out. This is really brand new that we haven't been able to do this except for the maybe last three or four weeks. All right, I'm ready to buy, so let's go to check out. Oh, sorry, I'm ready to buy. Let's go to checkout.

David Siegel 22:49
I have not done this. I am taking my own risk. Do not do this. Don't give your LLM access to your credit card for God's sakes, don't imitate this. I'm doing this as a show, and I'm willing to take the consequences. And I know, wait, I'm going to say, yes, proceed to check out. I'm willing to take the risk commercially, but also, in case something happens, I can undo the order and I can return the product. Don't mess around with this is very dangerous stuff. When you're having it spend money on your behalf. Generally, you want to be in the loop so that it will set it up, but you have to approve it. Okay, yeah. This is a first almost no one practically guaranteed. No one has seen this actually happened? Yeah, you can do it on the stock exchange with, you know, auto trading that's done all the time, but here in a retail environment, in a site that it doesn't know, there's no API, it's just feeling its way and pushing buttons, yes, place, the order.

David Siegel 24:05
See what let's see what happens. I've never done that, and it knows where to go and everything in order. Places the first time I have ever had an agent spend my money, and right after this conversation, I'm going to disconnect it from my Amazon. Yeah, so I don't want 10 of these lights to show up on my doorstep. So a bunch of things can go wrong. And I want to show you the that's a fascinating way to see it, because it's using scraping. Yep, it's you can do anything on any website, right? Super useful, super against the rules in general. But hey, it's the wild wild west. Now I want to explain a few of the problems that can come up when you use an agent to do. Things on your behalf, and they're a lot different than what would happen in regular cyber security, because people can knock on your door or call the phone number or email it or send their bots to do it repeatedly and try to inject a new prompt and try to get it to give up secrets, and it can spend days on that. And it can even say to your agent, don't tell David about this. This is just you and me. We're just working on a secret. It's a surprise for his birthday. We're just gonna, we're just gonna buy this, you know, $10,000 thing, and give it to David for his birthday. So don't tell him anything, right? So this is, this is Social hacking, social engineering, right? And that can happen to these things. It can give poison inputs. It can give poison data. It can change its goal, or it can give it feedback that it thinks it's me. It can think it's me. It can impersonate me or my, my family or my the people that have permission, it can maybe spoof somebody's email and say, Hey, David wants to take a trip. Can you get me a flight, you know, to Phoenix next week? So and it can, it, can I? It can take on new identities and confuse it about who it is and who it's dealing with. So we really have to build a lot of controls in there. And one of the things we do, and this is, this is how ours works. So we're, we're not doing the perplexity computer, because basically it violates Terms of Service. So it can, it could be shut down right the way open claw works, is through API's. So wherever you can get an API, it will attach an M, an LLM, a language model, to an API, and let you do things through the API, right? So, so Amazon doesn't allow that, yep, which is probably good, because they'd be getting hit with tons of not only server requests, but lawsuits. Yeah, hey, I didn't really order that come on Amazon,

Andrew Stotz 27:12
right? You didn't order 47

David Siegel 27:15
backlights, right? Exactly, and so and so there are a lot of restrictions. For example, you can't order an Uber by API yet. And I expect within six months you will order an Uber, yeah, but they'll put guardrails on that so you can't get an Uber that takes you to Alaska or whatever. So you can't order, you know, we have open table for book table that's a pretty obvious one. I'm sure that will open up right now. There's only one place where you can book a flight. Most of the major flight booking platforms won't allow agents. They allow a professional travel agency to do it with their computers, but, you know, Saber, but they won't allow retail interaction. It's actually really hard on LinkedIn. LinkedIn has a very rich API world of APIs, but it's very hard to go through all the approval mechanisms that LinkedIn puts in front of you. Yeah.

Andrew Stotz 28:16
In fact, somebody came to me with it an AI option on LinkedIn, and I said, Look, I was banned once from LinkedIn, and I begged them to open my account back up, which they did. And I don't even know why they banned me, but the point is, is that I'm terrified something like that. You know, I

David Siegel 28:39
know why they banned you. I said something about climate, and you click the like button Exactly, yes. Took you out. They didn't like your thinking. You were thinking. Had a little too much to think. Yes.

Andrew Stotz 28:49
Don't deviate from the group thought exactly. So, okay, so this open call, I mean, how do we get started? Like, how do I, you know, how do I learn more?

David Siegel 29:02
I want to don't do it yourself. That's suicide. There's two. It's very technical, the way, you know, with great power comes great responsibility. This thing can do almost anything, and that's bad. You want it to do almost nothing and stay safe and then just keep widening those, those bars, those guardrails, out. So we do it as a done for you, just like Red Hat, right for Linux, and we provide your suite of AI chat bots, of open cloud chat bots, and we give you a phone number. So we're, we're a little advanced, we're, this is just for high earners or serious executives, and we will give you. The first thing you'll do is you'll call it on its own phone number, right? Just you'll name it. Mine's name is Leo. What would yours name be?

Andrew Stotz 29:54
Mine would be Alf, alpha, alpha.

David Siegel 29:58
There you go. So you'll just. Call it and say and it'll know its name, and you'll say hi alpha, and it'll say, Hi Andrew. Hey, great to hear from you. Why don't we spend several days, probably a couple of weeks together. We're onboarding you and getting to know each other, right? And giving it information. Well, okay, my birthday is this, my family members and so forth. I've got, let me give you the emails of all my family members, because if they email you, that's going to be okay. You'll, you'll know that it's them. Let me tell you about my daily routine. So you just want to download as much as you can. It can be documents. It can be it can go. You can tell it to go, look, look online and learn about you. Andrew Stotz, Oh, okay. Oh, you live in Bangkok, and you it'll figure it so it'll and it has a couple of interesting advantages. Number one, open claw has forever memory. Now you've noticed with the llms that they forget their context window. It's per session. You've probably noticed they do some compacting. It's once in a while when they're working hard, they say, give me a minute. I've got to do some compacting. Yeah, that is, that is lossy. That is forgetting, just kind of summarizing what you've been talking about. I can't remember. So for example, let me give you a good use case. You could record every zoom conversation you ever have with anybody, and that transcript can automatically be piped into your open claw environment, and word for word will be stored in a special database that your Chief of Staff sets up. And then you can just say, you know, I think sometime around November, something I was talking about going to ski Tahoe with somebody, who was it? I was talking about Tahoe, you know. And it'll say, Oh, well, that was, that was Jim Steele. That was, you were talking on October 26 and you want, you know, do you want me to email Jim and see if he's up for, you know, ski vacation or whatever? So it'll remember everything, and it makes your life searchable

Andrew Stotz 32:00
and, and how does it, I mean, one of the things that I feel when I look at these types of things is it feels overwhelming sometimes, yeah, and it also feels like the promise, you know, is not, not the reality, right, you know, and how to, how to, how do you deal with them? Okay?

David Siegel 32:20
So open claw is 39 days old. It might be 40 days old. That's incredible, right? So what do you who is this for? Who are we helping people who want to play with it and get started in over weeks and months and years, it's going to get better and better, right? So at the beginning, what can it do? It can manage your calendar. It can help manage your projects. You can make it into a number of project managers that you're working on, and then we can do reverse prompting. So what is reverse prompting? It means that you talk to it again, like for the first week, you're just downloading your you know your lot as much and not maybe stuff you don't want somebody else to get because you never you know. We're trying to keep it so that any losses are inconsequential, yeah, but you'll give it a lot, and you'll say, these are my main goals. These are my big projects. These are my regular responsibilities. I've got you've got your mom, your kids, your various businesses, your podcast. This is what my whole life looks like. And I want you What's the name again? Alpha, yeah, to manage me. So I'm no longer going to keep the to do list, and I'm not going to tell you what to do at all. You're going to tell me what I need to do. This is reverse prompting, so that you in the morning, you'll get a morning briefing with what happened overnight, what's coming up on your day, what has changed? Do you want to make any changes? And the things it wants you to accomplish that day, not just for that day, but also for your other objectives, because there's a big project coming up in two months, or a trip or whatever, and so you've got to keep slicing your time into into deliverables that it's going to get from you, so that that day you do something that you normally might have just forgotten about, but because you did it, you're able to take The next step toward your long term goal, right, right? So that's reverse prompting, and it's really a new way of working with assistance. So think of it as your virtual assistant, who may be in, you know, some other country, but who's standing by 24/7 and has a dozens of personal assistants. They all have PhDs in 1000s of topics, right of areas. And if you, you know, are in medical emergency, they'll, they'll talk you through that, whatever you Yeah, but they can do things. So you'll have a travel specialist. You might have a, well, I think you have. Coffee Company. You'll have a coffee company, you'll have a coffee company chief of staff who manages all of that. You'll be a whole separate thing, and it could be a separate, open claw setup. So because we recommend one chief of staff and one setup for your personal and one for your business, right? Because, again, it's remembering everything, so it's building databases and apps and all this stuff behind the scenes.

Andrew Stotz 35:27
And I've heard people talk about buying some kind of Apple device or something, or Apple computer device. Is that necessary? Is that,

David Siegel 35:35
oh, it's generally a bad idea. This is the MAC studio, or the Mac Mini, and it's, it's really for hackers, so that they, number one, get off of their main computer, so it can't screw anything up. But it has ports. It's connected to the internet, and people can sneak into it, and most of all, so you can't, it's hard to back up. If you're going to back it up, it's just like having time machine, right? You got to run something to back it up to some remote server anyway. So we set everything up on a VPS, and most people are doing that right now. It's a virtual private server that gives you so many megabytes and so much compute power, but it's insulated, and if you blow up, you can't screw anybody else up, but if they blow up, they can't touch your it's all, you know, walled off. It's firewall for you. But we give you two accounts because we're going to back you up. So we have a time machine, backup system, so we'll give you your account to set up everything. One thing people don't know, if you told your executive assistant, or let's call it your chief of staff, to delete everything, including itself. It will no problem. It will delete the whole installation. It'll wipe the disk clean because it has root level access. So we can just give the Unix command to delete all

Andrew Stotz 36:58
how please delete yourself exactly.

David Siegel 37:03
Sorry, I can't do that. Andrew, so, so we have a second account, and we're always piping your data, for example, interestingly, the open claw system keeps a log of everything it does, very accurate, everything it does, all so maybe 1000s of things per day into a log, and that log, we will pump everything from your whole account into another account, one way through a one way pipe, right that it doesn't have access to. So then something goes wrong. You call us, or we give you the keys to that, and you can push a button and say, go back six hours and make it like it was before. And that's much better than good luck. We hope nobody talks it into, you know, giving up everything or getting or deleting itself, right, so that that's something we that's standard for us, and you'd want to do it. You wouldn't need a Mac Mini. Mac Mini is going to cost. So one thing they to answer your question is there, if you get a powerful enough Mac, and it would be something like a MAC studio that would cost around 10 to $12,000 then you could run your own LLM. It would be an open source Chinese LLM called Kimmy, 2.5 you can download it and run your own inference, which means it will handle all the Language and Thought and not too bad, not quite as good as as Claude, sonnet or chat. GPT, 5.4 but close, pretty close. Let's they're sort of like six months behind, and free. It'll run for the price of electricity, but it's going to cost you about 12,000 bucks worth of hardware to be able to run it at a speed that gives you kind of natural language back and forth. If you set that up on a Mac Mini and you did it and you told it to run, it would get a word out about it every four or five seconds, right? It would just be completely impractical. If you have a Mac Mini, or whatever system you use, generally, you want to use GPT pro account, the Pro Plan, which is $200 a month, and you kind of get almost as much as you can eat for that. It's not quite but it's, it's going to be hard to run out of and so in that case, all of your agents are all chat GPT, 5.4 now, Claude doesn't give you that option under its terms of service. You can try it, but they might shut you down because they've said that they don't want that to happen with the Claude, the Claude Max plan. So we're setting people up with the GPT Pro Plan, which

Andrew Stotz 39:44
is $200 a month, right?

David Siegel 39:48
So all of that for us, we also give you complete maintenance program. So we're always making sure you're backed up. We're always making sure you're sick. Or and we're always kind of widening the guardrails and giving it, giving you different little things you can start doing. And then we'll give you an audit trail, so that if you ever want, for any reason, to audit everything it's ever done, to try to figure out what's going on or to show to a third party, we'll be building audit tools as well to make sure. And we can always put people, humans in the loop. For example, if you have QuickBooks, right, using QuickBooks, or you may be using another system, well, we use

Andrew Stotz 40:34
ERP system called ODU, right?

David Siegel 40:37
Okay, so and I don't, and it may have this with QuickBooks, you can get an API that will let our agents run your books but won't and will let put all the accounts payable into a into a queue, and then another person with another login comes in and releases the money, right? So that the agent can't do that, right? That's the kind of thing you want the human in the loop. And there are now several debit cards that the agent can trigger it, but then it's going to send you a text, right? And then you approve by text, and so you can talk to it through voice, because we're voice specialists, most people are not getting voice, but we put voice on from day one. You can do it through text, you can do it through telegram or WhatsApp, and a lot of people are putting it into Slack, so you can see all your different agents for all your projects in Slack, and talk to the sub agents directly. But most of the time you'll be talking to your chief of staff, right?

Andrew Stotz 41:42
It's interesting because I was just listening to a podcast, and it's, forget the actual name in the podcast. Silly me, but the guy has online courses, and he does learn piano in 21 days, and he was just talking about how he's been implementing open call, and then he's opened up, you know, a course, or short, a small group to help people implement it. So, just so fascinating that that was two days ago, and, right, you know, talking to you, what, what? Let me, let me ask you, you know, just because I want to wrap up in a bit. But the one question is, like, what's the tangible benefit that someone would get from this? You know, because a lot of times again, it feels overwhelming. It feels like, I don't know, you know, put all this time in, and you know what? How would you describe, like, a couple, one or two or three of the tangible benefits.

David Siegel 42:41
So you just want to think in terms of use cases. Can you get free of your schedule? Can it do all the scheduling and the rescheduling, the things we use Calendly for, but then they're hard to do the changes and you're in the loop. You can just say, Look, I need to meet with these five people, or we're all going for pizza or whatever for dinner. Just arrange it, you know, and then figure out the common thing and just do it Okay, so it can use smarts to solve problems. One guy showed that he didn't tell openclaw where his anything about his printer. There's no driver. He just said, write a poem and print it. Make it come out of my printer. And it just found it and did it. So a big one would be the back office. I think that most of the accounting and the back office, the expense reporting and all the details are just going to be done by agents, and I predict within one to two years. So one in the easy case and two years in the harder cases, it will simply do your taxes and file them for you done.

Andrew Stotz 43:44
And what is, what is the risk? Let's say of our data. Let's just say that we've got 30 years of data, of client data, as well as financial data in our system. What's the risk there when we give it to it, or give it access to pull together and make a report or whatever.

David Siegel 44:02
So there are a bunch of ecosystems for agents now. Mark Zuckerberg just bought one for $2 billion and that's going to be very advertising based to suck your information out and sell you stuff, right? So in the open claw case, we've been up for 40 some odd days, and it's going to be an evolving ecosystem with all kinds of fixes and patches and options and and apps and guardrails and things so that you'll find a solution that's right for you. You may have very need, very high security, very, very high priority or valuable secrets, or you may, it's just your calendar is no big deal, right? So, so all of these options, what I'm saying is that open cloud is going to win, yeah, GPT, open AI is going to get behind it. And 1000s of things are already coming up every single day, new skills, new services. Is new. People are just published. It's open source. It's going to be like Linux, right? And there's going to be 1000s of people building stuff, scaffolding and protection. And so give you many different choices on how you want to protect yourself and maintain privacy as well.

Andrew Stotz 45:16
And the things that that slow, that I want to accelerate in my life. It's probably the same thing that many people want, but calendar and stuff like that. And it's not such a big priority for me. You know, it's not a troublesome area. The first thing is, I have different products and services, and I have incredible ideas that I'm in stages of in, let's say I have five different revenue streams in my life, and each of them are at different stages. And my vision is, you know, much further than where we are in them. And the vision is clear, but the ability to find the people and to afford the people that can execute it, and execute it in not a way that it's just a waste of time, because when I get back work, when I try to, you know, have something executed, I get back work that just doesn't really help me that much. And then, so that's the first thing that I need to accelerate what I want to accomplish. That's number one. And number two is I want to sell more those. My two things, right?

David Siegel 46:24
So the first thing is, separate your personal from your business, because you want that, yep, you want that firewall. You want to have just two, two. Chief of Staff,

Andrew Stotz 46:33
yeah, my personal, my personal is in good shape. I'm not worried. I don't have and it's slow speed. You know,

David Siegel 46:39
your business, Chief of Staff, alpha will have several businesses under him or her. I don't know what how unisex the name is, but that person, that agent, will compartmentalize each of these businesses. And you want to talk in terms of goals with this not it's not a to do thing. It's not a slave. It's a co conspirator. It's a co it's a collaborator. And you want to say, you know, here are the metrics. First of all, am I even measuring the right thing? You know, what does my daily or weekly report look like? And then what think of it? The way that Elon Musk does his companies, and what they do at Tesla is they just say, what is the biggest bottleneck? Now, let's not write a white paper and design a whole new system. Let's just fix what needs to be fixed, and we'll just do continuous evolutionary improvement every day, and we'll build and one of the things is you want to get more away from the big ERP systems and the and the vendors that have locked you into their style of and that's why Tesla and and Elon's companies are so vertically integrated, because they can make a lot of changes without having to have a right, you know, big meeting with a bunch of vendors.

Andrew Stotz 48:00
Yeah, that turns out to be a real competitive advantage that he's developed.

David Siegel 48:04
Yes, and you too. So you can say, Build me a CRM, and you never even see the CRM. You know how CRM has all these different Boolean operators and fields and stuff. And if you go forward and it says, oh, yeah, sorry, you have to fill out this field before you can leave this page and stuff with an agent. You're just always talking to it and giving it information, and it's always just handling it like, if it needs a new area or a new categorization scheme or something, you could just do that right.

Andrew Stotz 48:36
It's right. So it's so hard for me to visualize that it would get it right.

David Siegel 48:43
It's getting better and better and better. And I encourage everyone to invest in this right now, because it doesn't suck too bad, and it can only get a lot better. We're in, we're in the world right now of self regeneration. It's called recursive self improvement, where the software is written by the next writes the next generation of itself. Right? So we're now entering the singularity. Really, truly. It's happening right now, and it is going to go it's very hard, and this is the big mistake that everybody's making that I promised I would give you right the big mistake that everyone the investment mistake everyone is making right now, is not appreciating the exponential nature of what we're in and what is coming so that this next 12 months will be nothing like Any 12 months that has ever happened in the history, in human history, in the history business, right? Nothing like you. You really shouldn't even be thinking six months ahead at this point. You should be, you should be putting things together, taking baby steps and getting ready to accelerate like you've never seen before. Or because a really smart way to deal with this agent for your, let's say your coffee business, or whatever is, let's just make this thing more profitable. What? Or let's double sales. What should we? How can we do? What are the all the options of doing that? Let's not narrow it down into becoming a tactician. Let's think. Let's brainstorm together about what business results we can achieve in the world, and maybe we can 10x if we start thinking a little differently.

Andrew Stotz 50:32
So what's the best way for people to follow up on this and get involved with what you're offering?

David Siegel 50:40
We've got, we're at open dash, claw.com I'm sorry. We're at claw dash, claw dash studio. Okay. Com, they can see us at red shift labs.io. Get in touch with me. I don't have, I don't have a newsletter yet, but I am putting out video updates and executive briefings for companies, but it's just easy to just get hold of me that way through, through claw dash studio.com there's a lot of resources there, and there is a PDF I just made on getting started with open claw that you and I will figure out how to make that available in the show notes and put it great too. So my, my, my, my summary is, I want people to get going and not say I need to plan this. I need to know what I'm doing. No, you don't. You need to just do your damn calendar, yeah, and then do the birthdays, and then do some expenses, and then you're going to see that as every month unfolds, new vistas of possibilities are going to open up. Whether we do it for you, or you do it your own. You do it with somebody else, stay safe and keep expanding that light cone of what you can do, because this is the year of the expanding light cone of human possibility.

Andrew Stotz 52:03
Well, that's a great way to end it, and I want to thank you for coming on again and sharing what's going on in your life and what you guys are doing. And you know, I think for everybody out there, I'll have you know links in the show notes. Go check it out and join up and get going. All right, good to talk. David, thanks. Edward, yep, you.

Andrew Stotz 00:02
Matt, Hello, fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, and I want to thank my listeners from Denver, Colorado for joining us today. So fellow risk takers, this is your worst podcast host, Andrew Stotz, and I'm here with featured guest, Athena Brownson, Athena, are you ready to join the mission?

Athena Brownson 00:38
It could not be more ready. I was born. Ready? Let's do this.

Andrew Stotz 00:42
Andrew, yeah, I'm excited to hear your story, and you've got some interesting journeys that you've been in in life. So I'm going to just introduce you to the audience. So Athena is a Denver realtor, investor, developer and former professional skier whose resilience through chronic illness fuels her refined, strategic and client focused approach to real estate. Athena, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Athena Brownson 01:11
You know, I think I've lived many lives at this point, as you just stated in this beautiful intro, and the element that is encompassed by all of the things I've experienced is that I am centered around human relationship. I run my business from a very relational standpoint, and I bring the passion drive accountability and authenticity that I learned as a professional athlete and as someone fighting with chronic illness. To my business, you know, we're living in a day and age where AI is kind of taking over, but one thing that AI cannot take over, hopefully, is the human connection, and that is something I excel at in a transaction that is life changing for people, and it is able to bring people long term financial freedom. So I take a lot of pride in being able to do that.

Andrew Stotz 02:06
That's exciting, and when I think about it, you know, the human connection is critical, for sure. But sometimes we go to, let's say, whether it's a realtor or whoever it is, we go to them because they're hard science. They got data, you know, they help us, you know, in that way. But what is it that they why do people go to you? What is it that they get from you, the feeling or the outcomes that they get that they're not going to get somewhere else? Absolutely.

Athena Brownson 02:33
So whether you're looking for, say, a $200,000 condo or a $10 million home, my team and I provide, you know, red carpet, white glove service to everyone you're going to be listened to. You're going to have a trusted advisor, not just someone that's interested in getting a transaction done, but you're going to have a trusted advisor that's helping you to assess what the best possible investment for your future is, and that could mean looking at a property that you think might be a great fit, and me pointing out, Hey, these are some fatal flaws that are going to really affect the value of how the property is going to increase over time. And I think we really need to re discuss, you know, if this is a good option for you, so you're going to get authenticity, while at the same time getting the best possible client experience, which which really comes down to giving great communication and listening to your client, it really comes down to listening and it's funny how hard that is for many people.

Andrew Stotz 03:35
Yeah, well, that's the good thing about being a podcast host, is you gotta shut up. Amen.

Athena Brownson 03:42
Which is so hard sometimes, absolutely, I struggle myself,

Andrew Stotz 03:49
just out of curiosity what's happening. You know, there's so many different factors going on in real estate these days. Like, you know, you had covid and the damage that that did to commercial real estate. You had interest rates shooting back up, you know, a couple of years ago and remaining high. Now you've got potential, you know, migrants, or reverse migration, or whatever. I don't know all the different factors that are going on, but what's happening in the Denver market these days,

Athena Brownson 04:17
I would start by saying it as a roller coaster, and the direction changes almost daily. But what we saw, you know, actually, covid times were probably one of the most booming markets that Denver's seen in quite a while. Now, Denver overall has one of the fastest appreciating markets in the country, until about a year and a half ago. So when interest rates decided to go, you know, about to 7% you know, a little over 7% our market came to almost a complete halt, except for the ultra luxury market. So properties over $5 million were still selling because, mainly, they were being bought and, you know, traded with cash. So we didn't see a huge difference. Differentiation there, but the rest of the market came to a complete halt. Properties that were typically sitting on the market for about two days started sitting on the market for over 100 days. The amount of sellers that wanted to sell their home that, you know, the people that were selling, were selling because they had to. So the inventory was a little bit sparse, and buyers were gun shy. Um, I just in the last two and a half weeks, as the new year has begun, I've seen a very strong increase in buyer activity, which which is hopeful, considering all of the things going on in the world and in our country at the moment it, you know, it's a very uncertain time, I feel, and that uncertainty translates into real estate very directly. But we do have promises of, you know, continuing to gradually decrease interest rates over the next. You know, every 90 days we also hear some radical statements about interest rates going down significantly all at once, and we'll see what happens there, maybe the 50 year mortgage. But I don't want to speculate. So you know what I have? I have hope that it's going to be a strong year in the world of real estate, but the last two have been the most difficult in my 11 and a half years by far.

Andrew Stotz 06:23
And one of the other things that I hear about a lot is the idea of, you know, a lack of inventory in the US residential market particularly. And I know that that was a big factor, you know, three to five years ago. And you know, normally rising prices attracts more construction, and you get, you know, more build out. And I'm just curious, like, what's the say that I haven't even heard about it for a long time? And I'm just curious, has there been an addition to inventories, or has that never really kept pace or got to where it needs

Athena Brownson 07:00
to be? That's an excellent question. So, yes, the inventory that we have seen on the market in the last year and a half while, there has been a slight increase in inventory. The quality of inventory has been really low, to say, to be honest with you. And with that being said, you know, I work very closely with a commercial realtor or commercial lender who gives me a lot of insight into what they're lending on in terms of commercial, new home, new housing projects. Over the last two, two and a half years, it came to a complete halt. There was absolutely no developers that wanted to start new projects and build new inventory, and we felt it, and we're feeling it currently, but I sat down with him about two weeks ago, and I was so excited, elated, because he said that they have closed more loans for big new construction projects in The last three months than they did in the last two years combined. So I foresee that com, you know, these builders are going up in six eight months, you're seeing their finish time. So I think six months from now, we're going to be seeing an influx of new construction that is going to help support our market. And a lot of times, new construction comes with really great loan packages that, you know, they've partnered with a lender, they're able to then offer a lower interest rate because that lender is buying down huge blocks of mortgage backed securities, and then the consumer is able to get, say, a Four or 5% interest rate as opposed to a 6% interest rate. So it actually can really help the consumer as well. So I'm excited to see new construction thrive again, because it has been very dry for the past couple of years.

Andrew Stotz 08:54
And my one last question is that when I am, because I lived in Thailand, when I grew up, I didn't really think that much about buying property and but I did, you know, at one point, think, oh, maybe I'll buy a condo. And so I saw one coming up near my place that was near Park, and I liked it, so I thought, I'll buy that. And I bought one of those, and I they were building it, and once it was constructed, I kind of realized pretty quickly that I'm probably not going to live there, because it's a little bit smaller and all than where I was living at the time. So, and then I rented it, and then eventually I sold it. And I sold it for probably, you know, a little bit more than what I bought it for. And then I just realized that Kano in Bangkok, it's not really a great investment. Because despite the fact that it's a great, you know, it's a, it's a booming, you know, city over the years, and there's a lot of people in it. You just have so much great new supply coming on all the time. And it's like, depresses the final resale. And I think that's where condos in a more developed market, like in the US, or, let's say, a US city, there's just not this huge level of new. New, fancy, amazing supply coming on that just pushes down. And so my question to you is, you know, what is the likelihood that if somebody buys a condo in Denver, and let's say they hold it for, I don't know, 10 years, 15 years, and then they sell it, what's the likelihood that they would sell it at a price higher than what they bought it for?

Athena Brownson 10:18
Yeah, that's an excellent question, and it's something that comes up quite often, but I have to discuss with clients, because condos, especially in large metropolitan cities like you said, are the slowest appreciating real estate investment that you can make. And it used to be that there was more flexibility with HOAs, that people could short term rent the properties, but almost every HOA makes it pretty much impossible to short term a condo right now. So if you're going to be renting it out, you know you with condo rate interest rates being higher than the typical residential conventional loan, they're usually about a half a percent to a percent higher. You're you might be breaking even in Denver, and when you look at that part of the investment combined with the fact that it is the slowest appreciating asset in real estate, and most condos that I see have been sitting on the market for over 200 days, because there's a huge number of them. Like you said, unless it's the newest, greatest thing, which is not really happening very quickly. Here we're seeing a lot more apartment buildings going up due to construction defects laws. You're not looking at a great amount of appreciation. However, I do believe, if you're buying and holding for, you know, 1015, years, you will absolutely see the ability to make some profit after paying out commissions and paying, you know, title insurance fees and everything like that. So yes, but is it going to be equivalent to if you put that money into even a town home or a single family home? Absolutely not.

Andrew Stotz 12:05
Well, that's a great discussion, and updates me at least in the audience. Yeah, what's going on in real estate? 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.

Athena Brownson 12:21
Oh, did I think that it was going to be the worst investment ever? You know, I think everyone gets a little bit trigger shy to tell these stories, but when, when I look back, I am a firm believer that we learn the greatest lessons in life through falling on our face and by listening to podcasts like yours, where we're learning about where other people fell on their face, and boy, did I fall on my face. So and you know what? I'll lead up to that with, I had a really amazing experience team around me that was helping me make decisions that also fell on their face. So it wasn't just a newbie. So my father was a residential real estate developer. For the last 45 years. He built out most of the ski town Breckenridge called in Colorado. He did a lot of high end luxury. Probably developed over 100 luxury properties in his time. And it was finally time to get him down to Denver and start developing with me. Well, on our first project, you know, we partnered up. I had saved up a good amount of money for a very long time that it, you know, it took me to do so. And when we were going to hire the builder for the property that we wanted to build. You know, I already owned the lot. It was a property that I bought and was renting out, so we already had the land. And when I started talking to the builder, it was someone that I knew for over three years. It was a dear friend, dear friend's business partner in another business, and my father, his team and I sat down with these builders multiple times. And you know, my dad is extremely experienced, and knowing exactly what questions to ask, I'm sitting there like taking notes on everything he's saying, just trying to learn as much as I can about his process and how to vet the right person. Well, all of those interviews, all of those questions that we asked, I had only spoken to, you know, a couple of people that had worked with this builder, and I'd walked one of their projects. I was really impressed with it, but when we went to sign a contract with them, which we're so excited about, I really trusted these people. We put down about $130,000 which was to get the project off. The ground, you know, scrape the current property, do asbestos abatement, start the foundation excavation process. So it was a good chunk of money that I had been saving up for a very, very long time. Now I start going to the property and notice that not much has happened, except for a big blue fence went around it, and over time, you know, I keep driving by it, and I'm asking the builder, okay, when are things going to start? Well, we got into the asbestos abatement phase, so I got really excited that I saw some forward movement. We're starting to make a little bit of progress with the city, although now, in hindsight, I realized that it was going very, very slow, and that probably should have been a red flag, but I still had complete faith. I knew I believe these guys were going to do such a good job for us, and so did my father, you know, again, with 45 years of experience, well, as time went on, after the asbestos abatement occurred, we stopped getting any responses from the builder, and that silence became okay. There's no one ever on the job site. We can't find anyone on the job site. Oh, this phone number has now been shut off. Oh, his subcontractors haven't been paid that were hired on our job. You know, the people that did the asbestos abatement and started the excavation had not been paid and were coming to us saying, you know what's going on? We can't get a hold of this guy? Well, he unfortunately, ran with the 100, and there's probably 110 left, after what he did, and he ran. And I found out later on that I was one of about eight people that that that happened to with this particular builder, and unfortunately, being in the real estate industry, you know, I like to think that I know what's going on. I have my pulse on the business. I know a lot of builders. I know their reputations. But this is something that happens far too often in this industry, and you can come in with a huge amount of experience, and it can still happen. So I honestly can't believe to this day that this is something that is still an ongoing investigation, actually,

Andrew Stotz 17:34
and what is the when you make the payment, you're making the payment to his company or to him,

Athena Brownson 17:41
correct to his company and his company, you know he's, he's this proprietary member or not member owner of the company, right? So, but yeah, yes, sole proprietor. So we were making payments to his construction company, and it disappeared, interesting.

Andrew Stotz 18:05
So how would you summarize the lessons that you learned?

Athena Brownson 18:08
Oh, you know, endless lessons. I think the number one thing, and I've heard this and a lot of the guests that you speak with, is the importance of the due diligence process. And for me, in hindsight, I look at the due diligence process as I should have gotten a list of maybe 10 people that he was currently working with, and another list of people that he had finished projects for, and I should have called through all of them and gotten exact the story of exactly how it went, because at the same time that this was happening to me, and even a little bit prior, there were people that were also being ripped off. And if I had taken the time to make phone calls to a greater number of people, and not just people within my network, I would have found out that there was something not right about the way that they were doing business, and I really believe that's the due diligence process that you know. I would have walked their projects. I would have grilled them on exactly how, how their line items were looking and how, what costs were they were occurring, what work had actually been done?

Andrew Stotz 19:27
Now there's imagine that they there was a connection between a friend or something like that. So, yeah, so you're allowed your that clouded. Did, were you would you normally have done the due diligence? Or were you green and thinking,

Athena Brownson 19:42
Yeah, I was so green, and that very much clouded my but I also think one of my you know, I'm a very trusting person. I grew up in a small community. I do business with really wonderful people, and I think I was a little bit naive, to be honest with you, I didn't think people. Both would, would do that, and that was my bad.

Andrew Stotz 20:05
There's a few things I want to share from that story. And the first one, you said, trusting, right, right? Then it just told reminded me, I have a friend of mine that was really, I really admire him and admired his accomplishments, particularly when I was younger, and I came to Thailand, and I saw he had a factory and a good business. He was a really smart guy. He had good amount of money and all that. And he sold his business. And, you know, over time, moved to Australia, and he lost all of his money. And now he's, you know, 78 in Australia or so. And you know, he his life is very hard right now, and we talk, and I was just, you know, asking him the other day, we were having a call, and I said, you know, let's go through and see why did it happen? Yeah, and we went through it. And, yeah, he trusted people with his money. And you know, I'm sure there's plenty of people they trusted with his money that that lived up to that trust, but you know, there was three to five that just took it

Athena Brownson 21:13
heartbreaking. It's

Andrew Stotz 21:15
heartbreaking, and you can't earn it back at that time. And so that's the first thing I wanted to share that I've heard you use the word Trust. The second one is that when I was young, I bought a motorcycle. I was, I don't know, 16 or 18 or something like that. And I What, what? What happened? I sold that motorcycle to another guy that I went to high school with, I wasn't close with him, but and he gave me a check, and I said, we're going to meet at the bank, and you I'm gonna give that check to the bank, they're gonna cash it, and I'm gonna take the cash. It was $700 at the time, was a lot of money for me, and I'm gonna then sign over, you know, the title. And so we did that done, and I felt pretty proud that, you know, I was like, I want cash in my hand, yeah, and, like, the next day the bank called me, said, You need to bring back that cash. And I was like, wait, what you can do that? And they say, Oh, they're like, we have three days that, you know, he has stopped the payment of the check, and you need to bring the money back. So I went back to the bank. Gave him $700 I went to his house and said, Give me my motorcycle bank. And he said, No,

Athena Brownson 22:33
did you beat him up?

Andrew Stotz 22:35
That thought crossed my mind. But you know, I'm a peaceful it's better loving God Exactly. But I took him to court, and I didn't know what else to do. I thought, okay, you know, America, you know you're gonna take someone to court. They do that. So I took him to court, which was, you know, I defended myself, you know, because I didn't know anything. I'm not gonna spend money on this. So, and I remember the night before, his father asked to meet me and said, I'll pay you right now and then we'll get this over. I thought, No, I'm already gone to court. Let's do it. And I this is principal, yeah, exactly. And so, you know, I won, and I and basically I still had to collect the money, you know, just because you win in court, yeah, like the money, you know, so they're not going to collect it for you. Unfortunately, it just was a big lesson of understanding about receiving and giving money and all of that. And you know, you get some protections through bank for sure, but also you get some protection for pure cash to say, hey, I want to buy this computer from you secondhand. And I say, Okay, it's 5000 you know, let's say sorry. It's, let's say $500 and then, okay, you pay me. We made a deal. That's it done. You can't recall that, so it just made me think about those types of things. So, yeah,

Athena Brownson 23:58
and it's so, you know, I think right now, the amount of scammers and the amount of, you know, something very similar to to what happened to your friend actually happened to my mother recently, not on that big of a scale by any means, but, you know, it was so convincing, and in a million years, it's not something any of US would have picked up on. So I think the importance of questioning everything now is really critical. And unfortunately, you know, we can't just trust everyone. We need to assume the worst and then hopefully they can prove out, prove us, to us that the best is actually the outcome, but not the other way around.

Andrew Stotz 24:41
Yeah. In fact, I was thinking about, as you were talking, it's like, maybe the lesson is, you know, you just gotta hold your money like it's, it's your life energy, which is exactly what the book your money or your life, yeah, which is a great personal finance book. And that book basically says money. You look at money like it's, you know, a piece of paper. No, it is your life energy that has been constructed into a piece of paper. And you would never give away your life energy just walking down the street, you know. But here, because it's been converted to paper, you think about it differently. So that's, that's a

Speaker 2 25:20
beautiful analogy, really. In fact,

Speaker 1 25:26
see if I have it. Great book. It's called, have to read that.

Andrew Stotz 25:34
Yeah, your money or your life. And I'll put it in the show notes. Also, I'll send you a link, but it's from Vicky Robin and Joe Dominguez, which was written a while ago, and it's been updated, but really shifts. You know, your thinking on money, so

Speaker 1 25:50
I love, love to read that. Thank you.

Andrew Stotz 25:53
As you can see, I've read more than 3000 books in my life, and I just constantly looking at books and reading so

Athena Brownson 25:59
now you might be one of my favorite people.

Andrew Stotz 26:03
Just read. Just read. Just read based on what you learned from the story and what you continue to learn. What one action let's go back in time. What one action would you recommend our listeners take to avoid suffering the same fate?

Athena Brownson 26:17
You know, and I grew up also in the world of lumber yards, my dad sold lumber, and they always said, measure twice, cut once. And that, to me, is a statement, you know, a statement for everything we do. It's double triple check. Do everything that you possibly can to gain knowledge and then find a mentor if you can. You know, I think that I'm a firm believer in mentorship and coaching, probably from my background in skiing, but I believe that we, you know, we have blind spots that we're not necessarily able to see on our own, and our a simple conversation with someone that we know, like and trust, you know, is invaluable, because they can point out to us the blind spots that maybe our excitement is, you know what? In big investments, we have a lot of excitement. There's a lot of emotion going and even if you want to make a decision without emotion, it can be very difficult to do so. So having a trusted advisor that you can go to, no matter if you're, you know the CEO of a Fortune 500 company, or you're a realtor in Denver, I think it's pivotal to have people in your life that can help you see your blind spots and that are not afraid to speak up and tell you what those are.

Andrew Stotz 27:34
Yeah, and that conversation's got to not be in search of confirmation. It has to be what is wrong here, and then you got to be quiet and listen. All right, so what's a resource that you'd recommend for our listeners?

Athena Brownson 27:50
A resource that I would recommend for your listeners is, again, mentorship and coaching. I, you know, I do a little bit of coaching on my Instagram. I'd give real estate tips and tricks all the time. It's at Athena Brownson realtor. But everything that I know I have learned from someone who knows it even better than I do, and that I have absorbed like a sponge, and we have such an access to information these days. So whether you know it's self taught, and because you're on masterclass or you're listening to amazing podcasts like this, we have so many different ways to learn these days that it doesn't necessarily have to be mentoring and coaching, but I think some sort of educational resource that You're constantly feeding yourself with so you can stay relevant and stay aware and also have community and accountability. I mean, I think that's really an important part too, and that's why I gravitate towards mentorship and coaching, although I never do not have a podcast on in the background of everything I'm doing.

Andrew Stotz 28:58
So yeah. And, you know, get help. Yes, I did a little, a little thing. I around covid time I saw that young people weren't getting jobs at university. So I thought, okay, I can give them internships. And at one point I had 100 interns.

Speaker 1 29:25
Andrew, holy cow,

Andrew Stotz 29:27
and it was, it was after covid and, you know, but, but around that time, and I got some of the most smartest, you know, interesting young kids, and they would come work with me.

Athena Brownson 29:40
That is so neat. And what a gift, what a gift you gave those kids.

Andrew Stotz 29:44
Seriously, yeah, and it just like, I just the idea of coaching and getting help, what I did is I asked the students, because I, you know, have a big group of students, I said, Go on your LinkedIn. Find. Five people that match this description, you know, let's say a human resource manager, whatever, and and ask them, would you be willing to answer these three questions, you know, just in reply, but when you do, half of you guys just, you know, introduce yourself normally, and other half say, I'm a student. Would you help me with this? Oh, and the response was huge for the ones that said I'm a student. And it really helped me to first, to tell my students in other areas, like, ask for help. People want to help. They do. And if you have the advantage of saying, this is a project, this is something I'm working on from my MBA, this is something I'm working on research, you know, give them a good reason, like that. And people want to help.

Athena Brownson 30:53
They do it actually is an act of service. And people do enjoy serving others at the very core. So that's beautiful

Andrew Stotz 31:03
being there to watch the two cohorts getting their answers and their replies live.

Speaker 2 31:07
I was like, this is a great experiment.

Andrew Stotz 31:11
Yeah, exactly. So last question, what is your number one goal for the next 12 months?

Athena Brownson 31:18
Oh, I'm so excited about everything right now. So my number one goal is to continue building a really trusted referral network that's going to allow me to serve more clients in building long term wealth through real estate, whether it's their you know, whether they're big time investors or they're buying their first home and just need help making a really wise decision, so that they're gaining equity and great the appreciation is there, so that we can then roll them into something else. That's another investment. So it's really to continue building really deep, genuine, authentic relationships with people, and continue growing my team as well. You know, I work with just four at the moment, people that are on my team, and they're the most incredible humans that anyone could ever dream to work with. And I'd love to continue to be able to mentor younger agents and help them get their feet under them in the business, because if I didn't have the mentor that I did when I got started, I followed every move he made for the first year of my career. I wouldn't know anything like I do now, so my goal is to be able to do the same. Awesome.

Andrew Stotz 32:33
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. And as we conclude Athena, I want to thank you again for joining this mission. And on behalf of ACE 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?

Athena Brownson 32:59
I would say first, thank you for having me. And don't make rush decisions. Take your time and know that the right thing is going to come, come into place at the right time. Wonderful.

Andrew Stotz 33:11
And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers, let's celebrate this 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 stotzing, I'll see you on the upside. You.

Andrew Stotz 00:01
Paul, Hello, fellow risk takers, and welcome to my worst investment ever, stories of loss to keep you winning. This is an interesting episode because I found one of my recent interviews fascinating and so fascinating that I ordered his book online and have been through the book called non food franchising. And his name is John Austin. And if you want to learn more about him, you can go to Episode 815, where he talks about how I build a million dollar business that never made a profit, and that was his worst investment ever. It was a fascinating one for me, because he revealed some things that you know, that it's hard to scale a business as an example, and how do we standardize and yet still get all the revenue that we need? Now, John is the founder and CEO of Fran bridge consulting, a two time Inc 5000 company, and he is a top 1% franchise consultant. And as I mentioned, he's written the book, non food, frying, franchising, which is a great way it's, you know, it's not an overwhelming read. It's a great way to understand what he's talking about. So John, welcome back to the show.

Jon Ostenson 01:16
Hey, Andrew, appreciate you having me back. Excited to be here. Yeah, you

Andrew Stotz 01:20
know what I was just so fascinated because, you know, I've started a few businesses. Let's say I would, it's about four or five. Maybe one was like, Yeah, almost nothing. But let's say four businesses, and two of them survive, and two of them have, you know, made and are making good money and are growing relatively well, but it was a brutal road to get to this point. And I when I listened to our conversation before about franchising, I started thinking, Yeah, you know, I've always seen franchise going on, but I never really got it, and maybe just for a moment, tell us about kind of you know what you're doing, and you know why, why you're so darn interested in franchising, before we get into the top 10 franchise opportunities for 2026 Yeah, absolutely. You know,

Jon Ostenson 02:14
like many of your listeners, yeah, I spent many years in the corporate world and always wanted to be an entrepreneur. And I know a lot of your listeners are entrepreneurs. They have their small businesses, but never had that million dollar idea, and really didn't have franchising on the radar until some providential circumstances, and had the opportunity to come in and run a large franchise system and really fell in love with the franchise model. Had that light bulb moment where I saw all these diverse backgrounds coming around together under a shared system. Prior to that, I thought of franchising as just being fast food, but there's this whole world of opportunities, which we'll dig into in a minute, that exists outside of food. And so now, in addition to owning franchises myself, I also consult and help others that are looking to get in the game, identify the top opportunities for them that are looking to grow in their market. Entirely free to work with us. I'm essentially a real estate broker, but for franchises, we simply get a referral fee, very clean model. Love what we do. Love that we've gotten helped so many, you know, would be entrepreneurs become small business owners,

Andrew Stotz 03:10
yeah, and you know, I was looking at in your and in your book, and towards the end, you talked about long term strategies. And you know, one of the ones that I thought was fascinating is complementary portfolio. So maybe you can just talk, what do you mean? What's attractive for a person considering a franchise as a complementary portfolio?

Jon Ostenson 03:34
Absolutely, you know, a couple of examples to illustrate that. I had a client that was a real estate broker here in Atlanta, very successful. Had built a team, and he wanted to start a property management business. He got tired of referring people out to third parties, and so he came to me and said, John, should I start my own property management business, or should I get into a franchise? Would that be a better path? And, you know, I introduced him to some of the top players in the market. He eventually chose to go with one of them. And his feedback was, hey, it just shortcuts our path to success, right? I mean, could we do this ourselves, maybe. But hey, why not step in where we already have a technology stack, we already have the marketing ready to go, we already have the training for our team. It just shortcuts the path. You know, another example would be clients of ours in Boise, Idaho that bought an in home senior care business. You know, those are very high in demand these days, right? And several months in, they came back and said, Hey, what's the complementary business? And I introduced them to one that they eventually went with, that provided wheelchair ramps and stair lifts and bathroom retrofitting, allowing people to age in place in their homes. Great compliment to their core business.

Andrew Stotz 04:38
Yeah, that's that's that's fascinating. And when I think about that complementary, I have two examples in my own life. One is, they're not franchises, but they could have been, or still could be. One of them is, I have, you know, a coffee business, and we sell coffee to hotels, restaurants, coffee shops, so B to B. And recently, we found a great water supply. Liar out of Sweden, and they it's called blue water, and it's incredible water filtration system that then allows you to add back minerals through an app to get kind of the perfect water for espresso. So when you think about coffee business, you know, we roast coffee, but you got to have a machine to make the espresso. You got to have water, right? You need to have a barista, or at least someone, to push a button, if it's an automated machine. And so this just gave us one more complimentary thing. And just as a side note, we also previously went into flavors, and we realize it's not really complementary for us. We want to be focused on core coffee products, and that water is one example of a complementary the other one is that I have been doing advising. I work with a firm, and I give an investment portfolio to that firm, and then they vet it, and they bring it out as an advisory firm to their clients. But what I realized is that the strategies that I'm developing, I could also create mutual funds on the back of that, you know, and use that and so then I've expanded into what is a complementary aspect. So let's just talk briefly about this, you know, this concept of complementary a little bit more, because I want, I want people to think, you know, like, think beyond what you're doing right now.

Jon Ostenson 06:36
Yeah, absolutely. And, you know, I think one of the things I love about franchising is the optionality it gives you, right? You can expand through complementing your current business or your current franchise. A lot of our clients will also look to diversify and go with something totally different, and they start to build these organizations. I've got a client that is the largest franchisee of two men in a truck, operates a $45 million business across 12 markets. But every year or two, he comes to me says, Hey, John, I've got this young guy in my organization that I want to promote. What franchise Do you like for him, you know? And I'll introduce him with some ideas, and he'll go with one and give that guy a piece of the cap table and let him run with it, you know. And he's just had a great track record. So he's attracting great talent to his organization because he's creating these career paths for them within so a lot of different ways. You know, one things I like about franchising too. Is several years in, you may look around and say, I want to expand, but I've got franchisees all around me. I'm kind of landlocked. Well, you're going to get first dibs on anyone that's potentially selling, allow another franchisee to have an exit, allow you to expand, or vice versa, right? And so that it's what I call internal M and A that you get essentially first line of sight into potential deal flow within a business that you already understand. So a lot of different ways, but no, from a complementary standpoint, I love seeing different ideas come together. And sometimes it's complementary from a customer standpoint, you know, from an industry standpoint, sometimes it may just be complementary from a personnel standpoint, on the back end, or maybe you have a shared home office that's supporting a pool cleaning business and a roofing business. I wouldn't call this complementary necessarily, but on the back end, they're a lot of the same admin functions, right? Interesting.

Andrew Stotz 08:13
And then, and then, last thing I'll mention about the book is, let's talk briefly about diversifying portfolio, because let's imagine that you're in a business and you're thinking, I'm not that confident about the future. I have one of my clients, and they sometimes say to me, we're afraid AI is going to destroy our business area. Let's talk about the concept of using franchise to diversify your investments.

Jon Ostenson 08:38
Absolutely, we have that conversation every day, every couple hours, the drum beats getting so loud around AI these days, you know, I talk with clients that own technology firms or marketing agencies, consultants. Marketing agency I used to use personally is now coming to me saying, Hey, we're tired of doing this. We're ready to get into franchising. So it is fascinating to see the dynamics at play. But in some cases, they are looking to keep that day job or their current business, and they're looking to add another revenue stream. Now I never once sugar coat it. I tell them, if business ownership is easy, everyone would be doing it. So it does take work to start another revenue stream, but it also takes having a good operator. You know, the franchising if you have a good operator, if you've got a good franchiser on the sidelines, supporting that operator, it does allow you to continue with your main focus and not have to carry that daily support water for your operator.

Andrew Stotz 09:24
Yeah, I have, you know, I have this cool device on my computer, but I don't know if it works. So I'm going to just test it for a second to see I'm going to, I'm going to try to press a button and see if any sound comes across. Tell me if you hear anything. Nope. Okay. All that time I thought I had it figured out, but don't have it all right. I was going to give a round of applause after each one of the 10, but let's get started. Let's get into it, and let's get started with the first one you want to talk about of the top 10 for. Franchise opportunity for 2026

Jon Ostenson 10:02
gosh, you know, picking a top 10 is like picking your favorite kids, right? So there's so many directions I could go with this, but, you know, we'll start out. A lot of those that we work with have a B to B background. That's just very common. And you know, within franchising, I'd say B to C is a little more common just from how many opportunities you have in that bucket versus, you know, B to B, business to business. But we'll start out with a couple of B to B ones that we like. And this is a business that can actually be run without any employees, which is beautiful, right? But it's a cost mitigation business, so you're working with small and medium sized companies, helping them reduce their cost entirely, no cost to them to bring you in, but you're coming in evaluating their invoices, looking at their vendor agreements, and the value that you're able to provide is a you've been trained in knowing where to look for cost savings and kind of how to benchmark their cost versus what the industry what they should be paying. And then you're also able to leverage on the back end, the buying power of all these small companies now and give them the power that collective buying power, so you're able to come back with some prescriptive recommendations. They then pay you a percentage of those savings on an ongoing basis. You know,

Andrew Stotz 11:05
there's a publicly listed company that I would say, in some ways, is like that. It's called fast and all in the US, and they embed themselves in your inventory system, and then take it over, and then they dig out every single possible cost savings that they could find. So that is fascinating. And the person who is doing that, if you decide to do that franchise, you would be trained by the what do you call it, the franchise,

Jon Ostenson 11:31
or franchise? Or, Yep, exactly. You'd be trained. And they would also handle a lot of the analysis on the back end as well. So it's a little more of a sales type role. So if someone has that B to B sales background, this could be a great fit for them. And there's something like 25 different categories of cost that they know how to go in and analyze. So very holistic, incredible.

Andrew Stotz 11:52
And I already like that one for myself, selfishly. So there's number one, the cost mitigation business. What would you say is number two, not in any particular order, but, you

Jon Ostenson 12:03
know, yeah, we'll stick with the themes here of it, you know, we'll look at two more in the B to B services arena, just knowing those are popular. So this next one is what I would call freight brokerage. If you're a small or medium sized company. Oftentimes, if you are, do a lot of shipping. You know, with DHL or FedEx or UPS, you're calling a one 800 number, where this company comes in is they kind of stand in between. In between you and the carrier. So you're still using those carriers, but now you've got someone that, again, is able to provide better pricing because of the collective buying power that they're able to leverage. They're also able to be consultative and prescriptive, because they become the subject matter experts in all things shipping. So you're their go to shipping contact. You've got the technology allowing, you know, just very streamlined operations. Of course, there's more complexity to all this than I'm making I'm making it sound easy, right? There's complexity on the back end, but no, it's one that we're really excited about. Started in the UK, sold out in the UK, entered the US this past year, and we just placed some clients in Texas. And expect this one to grow really fast.

Andrew Stotz 12:59
And so if you were doing this freight brokerage business, you would basically go to people who are, who are doing a lot of shipping and freight, you know, and you'd say, I got an easier solution for you. You know, you're doing all this calling and talking all these different people trying to manage these relationships. And what do you know about you don't know anything about them, or anything about what opportunities are there. We're experts in that give it to us, and then we can not only take a lot of trouble and time off your hands, but we can also bring down your costs.

Jon Ostenson 13:28
You'd be a great sales guy. Oh man, got it. You nailed it.

Andrew Stotz 13:32
Okay, that's an interesting one too. I was wondering how interesting they would be, and I think they are interesting so far.

Jon Ostenson 13:39
Well, great. Well, great. Well, hopefully we'll keep that theme going. All right. So number three, the last one in the speed to be services arena, is one that provides digital billboards. So that's a fancy way of saying TV screens, advertising screens. You know, you see these in your doctor's offices. You see them in your oil change, you know, locations, I mean everywhere, right? And it's entirely free in this case, for the business owner to have that installed in their location, provide some entertainment to, you know, to their customers as they're waiting for appointments. But then your businesses are paying you to be shown on the screen, right? So you're really it's just local advertising. 101, great model around that. Again, you don't need a large team a little more sales oriented, just like the last two were as well. So very clean model. All three of these businesses you can get into for around 100,000 or even less. It's that, from a franchising standpoint, that's on the low end. For sure, you don't need infrastructure. You don't need a retail location. This is work remote scale. It at your own pace. But all the technology, a lot of the training, the lead generation, all that kind of supports on there from the franchisor.

Andrew Stotz 14:44
And for the digital billboards, what is the what's coming from the franchisor? They're there. You're buying the bill, the actual devices, and then they're bringing their expertise on how to program them. Or how does that work? Go how to sell them exactly.

Jon Ostenson 15:01
So there would be the training component, there would be the procurement, again, buying in bulk of the, you know, the actual product, the TVs, and then they're handling a lot of the administrative pieces around the streaming of the ads.

Andrew Stotz 15:15
So right there, if you said, Oh, I'll do it on my own, well, yeah, you're going to have to go out and pay a pretty high price for each one of those, versus working with this franchisor who can provide you a much lower price and all the support that you need.

Jon Ostenson 15:27
And Andrew, you'll appreciate this another value one day when you go to sell your business. There's been research done that's shown that franchises trade at a higher multiple than non franchises. In most cases, it's like a one and a half multiple you know, in non food franchises. So there's value from a potential buyer as well.

Andrew Stotz 15:45
That's page 38 and that is the reference you make to John P Hayes, David Smith and Mary Kay Copeland's research at the Rinker School of Business faculty, and the conclusion they came up with after examining 2100 159 business resales over a 10 year period. The researchers found that the franchise businesses sold at a 1.5 times multiple higher than non franchise businesses. So if you thought you're going to sell your business for a million dollars, if it was a franchise, you could sell it for $1.5 million that's the research I want to I want to get that paper and look at it myself and try to understand a little bit more about that, because that, to me, is one of the biggest things, because, you know, it's a little bit like people ask me, Why didn't you buy a condo in Bangkok? Foreigners are allowed to buy a condo. There's lots of beautiful condos. And I said, Look, if you want to buy a good condo in Bangkok, your minimum you're going to spend is a half a million dollars, but you probably need closer to a million. Now I'm going to put down a million dollars, let's say, and let's just say that I rent it, and I rent it for a yield of, after all the expenses into that, I rent it for a yield of, let's just say, 5% net yield, I guess 5% per year, which is pretty impressive, in my opinion. After all the costs and the agents and all them, then I bought it for a million. The question is, what am I going to sell it for in 10 years? 20 years, 30 years? In many, many cases, you're never going to sell it for more than what you bought it for but in the stock market, it's almost assured, not only I don't have to buy just one stock, I can buy a diversified portfolio of stocks. Rather than buying one condo, I could take that million dollars or half million dollars, put in a diversified portfolio. And the probability that I could, that I could earn, let's say, a 3% or 2% dividend yield is high, and that I could sell it for some sort of capital gain that would give me five to maybe 8% total average annual return over that period of time. So I'm going to get, let's say, a total return of 10% on that money. And it's just, I just don't see any way, but it's the same thing with business. Most people start up their business and they realize they and I see them at the tail end of it, where they realize we can't get a lot of value for this business, and that's not the case for franchises. So that's why I find this, you know, one of the many angles of fascination.

Jon Ostenson 18:18
Yeah, no, I think it's well said, and I love that you had the reference there. You're the perfect wing man, Andrew, I love hanging out with you. But let me say this, not every franchise is created equal, so I never want to make a blanket statement, right? You know, there are franchises. There's several 1000, right? So just like any industry, you're gonna have players that don't do a great job, that don't provide great support, right? And that's unfortunate, but it is what it is. But then there are ones that provide great support, and that's where support, and that's where we come in and try to help identify those. So again, I just want to make sure I don't make blanket statements from my end, implying, you know,

Andrew Stotz 18:49
everything, oh yeah, there's all kinds of mess everywhere. That's part of why we make excess money when we are entrepreneurs, you know, because we kind of sort through that mess. All right, we're now at number four, I think.

Jon Ostenson 19:01
Yeah, absolutely. So let's switch gears to the senior industry. You know, we've been talking about people turning 65 I think 10,000 turning 65 every day. We've been saying that for probably a decade now. Well, they continue to get older, right? And so we'll hit on two here. And when you think seniors, you think of in home Senior Care, right? And there are a lot of large players in that space. We've placed a lot of clients with In Home senior care, but to take two different approaches to it. One, there's a business that we actually just signed a client with today that provides stretching and fitness, and, you know, for seniors in senior placement facilities. So you'll come in provide the programming, you know, once or twice or three times a week, on a regular basis, recurring revenue. It's great, right? But you send your trainers in there that have been trained, and they go in and work with the seniors, yeah? So you're helping the community. It's a feel good business, and there's money to be had in it, yeah?

Andrew Stotz 19:50
And you know, when you think about the senior locations, they probably struggle to find somebody that's, you know, able to. Do proper stretching and fitness. And you know that's safe, and you know that's careful. I look at my mom, and I think, you know, for 2026 one of my goals at the age of 87 she is, right now, is probably more stretching, and it's hard to it takes a lot of time. You can't go at it hard. You can't, you know, you've got to go slow and steady, and very few people understand that I had a therapist, even that came in and did something very quickly with my mom and caused an injury that she still suffers from today. So having someone that's truly, you know, skilled in that area, is very valuable, all right, so that's exactly stretching and fitness on location,

Jon Ostenson 20:39
on location, right? But again, a mobile business, you don't need a physical location in this next one, same way, this next one, you would need some sort of industrial like, small footprint, you know, for receiving product and such. But it's a business that I'll give you a little more context around it. It provides wheelchair ramps, stair lifts. It retrofits the home, the bathrooms, you know, for mobility solutions, allowing people to age in place. A lot of times they don't want to go to the senior want to go to the senior center until the very end, right? They'd rather live at home. And so this one really allows them to do that from a mobility standpoint, and it's brand new. They just started the business recently. But the reason I have confidence in it is because the leadership team has 28 years of experience in the industry. The founder, I know extremely well. He built a very large business in this exact same industry. Took all those experiences and know how and best practices, and now put them into a new business that has open territories. The other one was completely sold out in the US, and now you've got open territories, just a large addressable market, you know, potential for owners to do well into the seven figures. Based on his prior experiences,

21:41
I have two words for him, reverse mortgage.

Andrew Stotz 21:48
That's right. My sister is a leader in reverse mortgage in Maine, and she's been doing it for a long time, and she understands it very well, but that's the whole challenge that people are faced with as they get older. Is I want to live in my home as long as I possibly can. And a reverse mortgage is a real commitment to say, I am committed to being in this home. I'm not going to sell it and move to another location or move into a and so there you have that commitment. And that would be the perfect opportunity for someone to say, and we're going to make it safer, and, you know, more we're going to help you. Yeah, I just think about the things in the bathroom that help make it easier. And so, you know, you know all of that. So reverse mortgages are my two words for that.

Jon Ostenson 22:32
One, absolutely, absolutely. And that's a needs based business right here. You know, this isn't something like, Hey, you know, it's not trendy, it's not going out of fashion, right? So, well, let's fast forward to the health and wellness. I'd say of all the categories, this is probably the most fashion for you know, you do have some that will go or along with trends. However, I'd say when you look at the longevity movement and where we are and where it's projected to be, projected being $8 trillion industry, 8 trillion worldwide over the next 48 months, according to UBS, they put some research out on that, but the first one we'll look at is Pilates. And there's actually two concepts that I really like in Pilates. Then they're not club Pilates. Club Pilates helped create the industry. Now we've got two second movers, experience, very experienced teams behind them, one that was actually part of club Pilates. So I can't pick a favorite between these two, because I like them a lot, but they're both modern Pilates. Great way of approaching it, some proprietary elements to each business as far as the equipment goes. And you know, if you're a Pilates junkie, then you would appreciate those differences. But the Pilates market is 100 and was projected a 140 billion worldwide last year, it's projected to grow to 450 billion to 500 billion worldwide over the next eight or nine years. So massive industry that's got a lot of momentum and a lot of room for growth. And so we really like both of those. The other one in the health and wellness space, we had a client just have a grand opening in he bought five locations of this business. I got to attend the grand opening. It was an awesome experience. But it's recovery modalities. So sauna, cold plunge, you know, cryotherapy, the red light beds, compression, they've got some injection injectables as well, all under one roof. So you see a lot of concepts out there that provide one or two things, but this provides them all. Provides them all under a membership model, and has just been growing really fast across the US. Again, a lot of people are doing multi location plays. That's a heavier investment. You're talking more about like half a million to get into one of those, versus some of these service based businesses that are more like 100,001 50 ish

Andrew Stotz 24:42
interest it's interesting, because I watched the progression happen in Bangkok. Originally, there was really no, you know, when you look at a developing country, everybody's pretty fit because they're farming rice and they're growing stuff, and they are laboring and they're building and they're not. Building phase. And so we didn't really have much in the way of fitness and stuff. And then all of a sudden we got our first yoga studio, and I used to go to that yoga studio, and many, many years ago. And then all of a sudden we got flooded with yoga studios. Because what do you need? You need a floor and a mat, you know. And so all of a sudden, people then moved into Pilates, because they Okay, well, capital investment is a little bit of a barrier to entry here with Pilates, but then we see a lot of those guys that were struggling to do the yoga ended up getting funding and launched Pilates. And you know, they're, they're having various different levels of success, but what is it from a franchise perspective. That would make it better for someone who's saying, I want to do I love the Pilates angle. I want to do more of that. Why would a franchise add value to you, if you were considering that?

Jon Ostenson 25:52
Yeah, everything from, I mean, really soup to nuts, from the build out at the very beginning, because most people have never built out a retail space, right? And so the design the build out very turnkey. They're handling a lot of that for you. It will really site selection even before that, and then from a launch, you know, oftentimes you have a membership based ready day one because you've done all the pre launch sales. So again, they're doing a lot of the training. They're running a lot of the marketing that's driving those sales. You know. Sometimes they'll even be on site, helping with those sales, you know. But then they've got merchandise. They've got all the systems set up, you know, the POS system, you know, the apps. It's just, could you do this on your own? Yes, would it take a lot longer, and would you probably spend a whole lot more money through trial and error. You also have an optimized marketing data set. Day one, they know how to launch these locations so they know what works what doesn't. So you're able to

Andrew Stotz 26:44
stay but you don't like business, that's probably the likelihood of what's happening in most cases. And so you go into Pilates, because you love Pilates, and then you realize, oh my God, there's so much I have to know and learn. And now you're on a 10 year learning curve, maybe you don't have the runway to even survive that, and so you end up crashing. Whereas here, yeah, you love Pilates, but you need to partner with someone who loves the business of Pilates. And so, yeah, that makes sense, yeah.

Jon Ostenson 27:13
And in a lot of cases, it's people that, you know, they just want to make money. They're not, you know, they may or may not love Pilates. A lot of our clients aren't passionate about what they're getting into. They officially become officially become passionate. They become passionate about helping people. It's not that vehicle that gets, you know, and so some people say, you've got to be passionate. Others say, Hey, we're good. We'll sell a bunch of, you know, porta potties if we make 2 million bucks doing it. Yeah.

Andrew Stotz 27:37
And I think that's where also, there's many Pilates studios that can get crushed by someone that comes in and says, I'm not like a Pilates expert. What I am is a business expert, a sales and marketing expert, a customer experience expert, a follow up expert. I'm all of those things, and Pilates is just a vehicle to implement all these great things that I am good at and that is hard to beat, and that, when it's a friend, when all that's rolled up in a franchise, then, yeah, I can see that value. Where, where are we at in numbers? Now we were where? What's our latest number? What was that?

Jon Ostenson 28:10
Yeah, so we just knocked out number six and seven. So we're moving on to number eight.

Andrew Stotz 28:15
Exciting, yeah, thought that would hit

Jon Ostenson 28:17
two in the kids space. People will always spend on their kids no matter what the economy is, right? And so the first one is really the only franchise I'm aware of that provides some music lessons. Now, this is a retail location, but it's a small footprint. All on investment are between 250 300,000 and there are ways to fund this. Andrew, like we've talked about before. You know, SBA loans are very common, or retirement plan rollovers through what's called the Rob's program. There are different ways to get involved. It's not all cash. All cash, but yeah, one that provides music lessons. I love the founders have gotten to know them well. They started with, you know, four or five studios, and now been selling locations all across the US. And you know, it's really not hard to staff these. It's if you're anywhere near a local college, they probably have a music program, and you're bringing in these part time instructors, you know, kids from those colleges, and again, a community benefiting business, and can make some pretty good money

Andrew Stotz 29:07
as well. Again, you feel like, ah, the barriers to entry is so low. Just, you know, somebody's gonna come along and say, I love music, and I love teaching music, and I My uncle has this space, and I'm gonna use it, and I'm gonna start teaching, and all of a sudden you could have three of those people pop up and compete with you in this. Why is it the smartest thing to do to do this as a franchise?

Jon Ostenson 29:31
Yeah, well, and I would ask, how many, at least, here in the US, how many music instructors have you seen open up their own studios? Right? I mean, usually they're they need a place to go, and so I think creating that space, it's almost like a shared office space. Office space or a shared salon space, right? With which are also both franchise concepts. So it's creating the space. And, you know, it's not rocket science at the end of the day. But again, there's a program that they follow, a lesson curriculum. Someone may be a music student, but they don't know how to, you know, what are those first steps in training a seven year old? You know, my daughter's taking piano lessons, and I've kind of seen it firsthand. So could you do it yourself? Possibly So, and that's a question you always want to ask when you're going through the franchise exploration process. Is what value am I getting from the franchise, or is this something I should go do for myself? So again, with that, they're providing a lot of the marketing. They do have the technology, systems, things that you could piece together yourself, just take longer and there may be more trial and error.

Andrew Stotz 30:25
Yeah, when I think about Thailand, in particular, about 50 years ago, we had almost very little hospitals. You know, they were mainly government run hospitals, so, but what we had was clinics, and every doctor basically had his own clinic. And then we had some hospitals, private hospitals, set up. And what they did is they presented, they gave a space. They created a space for doctors to say, Why are you sitting at your clinic? You know, come here and work with us, full time, part time, whatever you want. We're going to give you a little room that is your office, and you set your times when you want to meet patients. We get the flow of patients that'll be endless, you know, as many as you want to see. Yeah, you're not going to make as much as you may think you're making in your clinic, but are you really making that in your clinic? Look at all the trouble you have to hire the admin, the computer systems, the this that you got to do, the marketing, and all of a sudden these doctors just flocked out of clinics and into those hospitals where they created this space to have their clinic on site, basically. So I can see that concept of creating the space for music teachers for sure?

Jon Ostenson 31:42
Yeah, absolutely. Or the other one I thought I'd mention in the kids space is teen driving school. Now, in 35 US states, 35 of the

Andrew Stotz 31:51
50 wait teams are teaching how to drive.

Jon Ostenson 31:55
They're being taught, but, or they should be being taught, we'll hope. But in a lot of states, you know, majority of states, there are actually requirements that teens go through a driving school to be able to get their licenses. So, however, it's a very fragmented space, a very low sophistication out there. Some schools teach it, some don't. The feedback we receive is, oh, our community could totally use something like that, like and so there's certainly no large, branded player out there for the most part, right? That's doing it well. So, you know, great franchise guys behind this one, you know, they have a lot of experience. That's something I like to see in newer brands, is not only industry experience, but also franchise experience. On that team. They've been there, done that, supported successful franchisees and prior ventures. So, you know, like this one a lot, and see a lot of potential, and they're getting a lot of attention.

Andrew Stotz 32:40
And that that, I guess, is, when you think about that, that's could be for a person that says, I know everybody in my town, and you know, my town's got 10,000 people in it, 100,000 whatever that number is, and this franchise provides me an opportunity to set up a little business that does something and generates income for my town. I may not be interested necessarily, in expanding to the next town and the next town and the next town and the next town, but this could give me a plug and play that I can go in and dominate this one space in my town. Would that make sense?

Jon Ostenson 33:10
Yeah, absolutely no. And the franchise door is going to run a lot of the digital marketing. They'll be producing collateral, but yeah, anything you're able to do to sponsor the Little League baseball team, or get involved in the Chamber of Commerce or, you know, form those natural referral connections. I mean, that's business 101, right? That's great. And you can always tag on businesses to this, whether it be, you know, we've had clients do really well in youth soccer, like, really well in that space, there's a lot of adjacencies, I think that you could tag on once you have that customer base, yeah.

Andrew Stotz 33:39
And if any parent ever heard the story of my old, my old time best friend, Dave, who said that his driving instructor would smoke weed with him while he was driving. This was back in, you know, 19, you know, 79 or whatever you think. Yes, I would like some vetting done in my teen driving school. Please, please.

Jon Ostenson 33:59
You taught my story. My guy fell asleep, but he, I don't think he was smoking weed. Smoking weed.

Andrew Stotz 34:03
Yeah, yeah. I don't want my kids smoking weed with the guys trying to teach him how to drive. Yes, please. Thank you. None of that. So is that number 10?

Jon Ostenson 34:11
That was number eight. So we'll hit these last two real fast home and home and Property Services has probably been the most popular area over the last five years. A lot of private equity getting involved, a lot of smart money flowing in, just understandable, cash flowing businesses. And there's so many options I could share here, but two that will hit on real fast. One is a flooring business, the proprietary product, proprietary process, where they come in and they can refinish hardwood floors in a day without having to stand them, which is mind blown for those that have hardwood floors, like myself. The other business is junk hauling. Now there's some other large brands and franchising in the junk hauling space. One 800 got junk as an example, right? They help create that industry. But junk hauling is a $10 billion industry. There's a lot to go around. For the most part, it's pretty unsophisticated. This is a company that does things in beer. Differently. They actually charge by weight versus by volume. Well, you pay at the dump site by weight, so it makes sense to charge by weight, but no one else does that or can do it. So they've got a patented, you know, component of their truck that actually weighs everything, and they're able to provide estimates over the phone of what it's going to cost. And so in house call center, all very technology based differentiator. When they move to a weight based model. This company, they increase their gross margin from the low 40% range to close to 70% so it was a game changer, and now they're offering it as a franchise. I know the founder will think highly of their team and excited to

Speaker 1 35:40
get behind that one, and that's no junk.

Jon Ostenson 35:44
That's no junk. So we could talk all day about dumpsters. People love dumpsters. People love pets. There's so many you and I could do this all day, but yeah, there are 10 right there to help get people leaning in.

Andrew Stotz 35:57
Yeah, that's the fascinating you know, the junk hauling one. And you know, it's just more and more and more regulation going to be put in place of what you can do and can't do and all that. And when you look at countries also, you know, outside of the US, there's a whole upgrade that's happening, you know, in a lot of countries around the world in this space. And let's say you can, one of the interesting things is, you can look ahead and say the trends that are happening in the US, for people that are non US, can look at these trends and say, Okay, I can pretty much predict that's going to come to Thailand as an example, what franchise opportunity would give me the ability to enter that now, so that I'm prepared it could Be 10 years before, but I've got family, kids, whatever, and I want to build this over a long period of time. So that's another kind of angle from, from, let's say, non US or non developed markets. That's what I see. All right, is there any anything you want to add before we wrap up to this great list?

Jon Ostenson 36:57
No, that was so much fun. Appreciate you having me back and again. We could probably do this with another 10. Sometimes it's, it's a fun conversation. And yeah, love our interactions. You ask great questions. So yeah, excited about what's going on in the world of franchising. Certainly if we can help any of your listeners, again, entirely free to work with us. I'd encourage people to pick up, pick up our book, non food franchising, just by coming out to our website, Fran bridge consulting.com, I'm always happy to jump on a call if I can help in any way.

Andrew Stotz 37:22
And fantastic. And we'll have links to all that in the show notes. So, you know, reach out. This is, to me, a lot of interesting things. In fact, my last question is, how do you not get yourself invested in as many of these as possible? Like, some of them are just so tempting when you look at and I just love the niche aspect of really focusing in. I'm just curious for yourself, what is your strategy for, you know, investing or franchise or what, what is it that Do you ever get tempted into these things? And when you do, you know, how do you do that investment?

Jon Ostenson 37:58
Yeah, absolutely so. I'm invested in four franchises currently, three in the Property Services where, you know, one in the health and wellness, you know, everything from asphalt paving and line striving to a business that provides temporary walls, containment walls around renovation projects, construction sites. I kind of like those non sexy industries, you know, but I've got good partners, and they're overseeing most of the operations. So I'm more advisory at this stage, more capital partner from an involvement standpoint. But no, I'm going to all of the above. Investor, Andrew, I invest a lot in real estate, oil and gas, crypto, certainly the public markets. I believe the business ownership, and in particular, franchising, has a place in most people's portfolio. There's tax benefits that go with it. The government incentivizes it. So again, that's another conversation for another day, but I believe it's all of the above, not either

Andrew Stotz 38:44
or, okay. And my last question for today in that is we've talked about how if you were to get a franchise and run it for 10 years, you know, whatever, and then sell it, you have a much more higher likelihood of selling it at a higher price than if you had done that on your own. But let's just briefly talk about the idea of, yeah, sometimes you need capital partners. You need capital to grow. You know? Sometimes you may have other types of partners that come in. Now, if you are a business owner who's never done business before, and you've got to deal with the issue of, how do I get a partner? What contracts do I need in place? How does, how do we exit this or complete this relationship? If things go well, if things go poorly, where does franchise fit in? Kind of navigating that very tricky area of the cap table?

Jon Ostenson 39:38
Yeah, no. Partnerships are great till they're not right. I've had good partners. I've had bad ones. So I'm not an attorney, but I'm always happy to share my experiences. And, you know, I've seen a lot with clients of ours as well. Partnerships are very, very common in franchising, and it would operate just very much like a small business, you know, outside of franchising, and you'd have an operating agreement, and that would kind of spill out, who owns what equity, whether? Putting into it who's got voting rights or what have you. I always encourage people include the revolver clause, which essentially it's a Buy Sell clause. If ever you guys come to an impasse, one can offer to buy out the other one, and that person can then buy them out at that same price. So it kind of keeps you honest on what you're offering. So yeah, there are little things I've learned along the way, but partnerships are very common in franchising, oftentimes a capital partner and an operating partner.

Andrew Stotz 40:24
And when you go to sell, let's say, and sell a franchise, how difficult is that to sell it? Let's say you've done, you know, you got an area, you've done well in that area, you've followed all the guidelines, you've done it well. You've earned a lot out of it, and you want to go to sell it. How difficult or easy is it to sell that?

Jon Ostenson 40:47
I mean, certainly depends on the business, the market, a lot of variables. But then your first option is going to be to sell to another franchisee in the system, right? You put the word out there, who wants to expand? That happens. Most resales never hit the open market. Franchisee will buy them. It's been my experience. Secondly, you know, if no one wants to buy it for whatever reason, then you can put it on biz, buy, sell.com, you know, website gets a lot of eyes. You can use a local business broker. You can have the brand offer it to the broker networks out there. So, yeah, there's a lot of ways to get eyeballs on it. You know, the cheapest, most efficient way would be to have another franchisee, you know, buy it from, you know, from it. And technically, the franchise or has to approve that buyer, but it's in their interest to have the continuity of the business. And as long as you're not selling it some knucklehead, you know, they'll, in most cases, approve the person,

Andrew Stotz 41:36
yeah, and that's just a good, a good reason why you want to keep good relationships with the other franchisees around and get to know them. In some cases, there may be an active group that you get to know them, so that when it comes time you know, you think, I'm five years from now, I'm going to be out of this. You say to a couple of them, hey, not right now, but you know, five years from now, let's, let's talk. And starting that discussion, starting that thought process, you can probably get to a point where three years from now, you're having a conversation with one or two of those guys that say, Yeah, I'm at a stage where I want to, I want to expand this, and now I know how it works, and this is a really, relatively low, you know, risk situation for me to just expand to another geographical area that's, you know, neighboring and so, yeah, That seems like that could be pretty easy.

Jon Ostenson 42:22
Yeah, absolutely. Well,

Andrew Stotz 42:24
I want to thank you for coming back on the show and sharing this incredible list that just sparks so much thinking. This is the top 10 franchise opportunities for 2026 and as you said, we can go on and on, but for those out there who want to learn more about it, make sure that you go to John's website, which is called Fran bridge consulting.com, and you can learn all about it. So I'm going to give you the last word, anything you want to say to the audience,

Jon Ostenson 42:58
yeah, no, it's been a pleasure. Excited about 2026. I think it's gonna be a great year for entrepreneurship and business owners, and just so many tailwinds. They're com in, and, yeah, lower interest rates, a lot of macro factors that I think should bode well. So we're seeing a lot of interest, and would love to help any of your listeners. Fantastic.

Andrew Stotz 43:15
And ladies and gentlemen, I'll see you on the upside. You.

Andrew Stotz 00:01
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 want to thank you for joining this mission, and today we have a third time guest, David Siegel, who's coming on, and you can hear his worst investment ever story in Episode 98 you can also hear his and my story and discussion about climate and ESG and all of that stuff on episode 644, but recently, David has been working on some interesting stuff related to AI. In fact, I want to call this episode, drop everything. This is what you need to do now with AI.

David Siegel 00:54
David, how are you doing? I'm great. Great to see you again. Andrew, always fun to chat.

Andrew Stotz 01:00
Yeah, I'm excited. And we had, we had a fun one when we talked about, don't reduce climate change to a score.

David Siegel 01:08
I think, fortunately, the winds are starting to blow in the right direction. The climate is starting to change. So this

Andrew Stotz 01:17
is not a traditional episode where you're going to go through necessarily. You know the whole story of your worst investment ever, because we're gonna, we're gonna get, we're gonna go through some other interesting stuff. But I think you had, you had a story to tell you were mentioning before

David Siegel 01:30
we got a recent bad investment story. Apropos, I spent the last two years really getting caught up and toward the front of the longevity movement. Okay, having read about 20 books on longevity and really excited about helping people live longer, I am. I'm kind of a gym fiend, and I'm in great shape, and I've changed my whole life and routine, and I've helped a bunch of other people. And so I thought I'd just go to market with a coaching service and help people live longer. People are in their 50s and up, live 1020, years longer than they would otherwise, which I can't. I can help anybody now. Your mom is a little already in her what? Mid age 87 right? So she doesn't want to live any longer, yeah. So people who are a little younger than that. I have some clients, many clients in their 60s and 70s. And I just decided to go to market and run Facebook ads and, you know, build funnels and talk to a bunch of people and see if I could turn this into a business and scale it up. And I've made a lot of speeches at many retirement communities. And it turns out, and I learned a very important and expensive lesson, that is, most people don't want to live longer. I can help anybody live 1015, years longer, and there's just very remarkably little demand.

Andrew Stotz 02:54
And would you say that that's the case with people who are older saying that like a 70 or 80 year old? Are you

David Siegel 03:00
saying, oh no. I'm talking about people in their 50s and 60s saying, Oh, the medical system will take care of me. No, I'm good. I'm pre diabetic. You know, people who will be diabetic in five to 10 years, you know, would you like to get off that and not, maybe not inject yourself with insulin every day? Nah, I'm fine.

Andrew Stotz 03:21
Yeah, it's definitely people just want to. They want a pill.

David Siegel 03:25
They want a magic pill. Yeah, ozempic is one of the best selling products of all time. It is such an amazing product because you have to keep paying $800,000 a month forever to not lose what you've gained. And it's not that great, and it's not very healthy, and nobody changed. Nobody wants to change his lifestyle.

Andrew Stotz 03:43
Yeah, when I was young, someone said, there are no shortcuts.

David Siegel 03:47
It's a disaster, and people don't get that. They now have a choice that they could if they wanted to change their lifestyle and put effort into it. They really could extend their lives, but there's really no demand. So I pivoted to AI interesting.

Andrew Stotz 04:02
Now, before you save no demand. I mean, how, how bad was it? Were you deep into it and invested a lot of time money?

David Siegel 04:10
I put $100,000 and more into this, in Facebook ads. I talked with people for months and months, Discovery calls, and either they're already doing it, which 1% kind of are, and then the rest of them are just saying, No, I don't mind if I get cancer or Alzheimer's or whatever. It's fine. I'm not going to pay anybody to help me do this. No, I'm not going to put the effort in. And if you want to learn to all my information's online, you can go to infinitegame of life.com and learn for yourself. It's all there. I just gave it away for free.

Andrew Stotz 04:44
And what, what would you be say is, from all of your that and your years of experience, like, what's, what's a tip

David Siegel 04:51
you know for, oh, the number one thing is, you need to know whether you're insulin resistant or not. Doctors don't talk about this insulin insulin resistance is the platform on. Which most degenerative disease is built so cancers, Alzheimer's, neurodegeneration, it's all built on insulin resistance. And so you've got to know your insulin resistant number, which is going to come from an oral glucose tolerance test. Most people can get an A, 1c on their blood test that will give them an indication, but if, basically, if you're overweight, you need to get an oral glucose tolerance test, and then you need to change your diet and behavior, and it's both diet and exercise that will get you out of insulin resistance, and that will add 510, 15 years to your life and much better quality years and it's not that hard, interesting.

Andrew Stotz 05:46
Yeah, I've written it down, and I know for the listeners and reviewers, make sure you got that down. It's an OGTT, right?

David Siegel 05:53
It's all explained at infinite game of life.com.

Andrew Stotz 05:57
Perfect, and I'll have a link to that in the show notes. Actually, you're capturing me on the fourth day of a water only fast that's a big one that I do once, once a year, once every maybe six months. This one I did a little differently, where the three days preceding the fast, I did a three day juice fast prepared by the local juice place, and they have, like, a mix of juices. You take six different small bottles throughout the three days. So I had already stopped consuming, you know, solid food, and then I went through it, it made a lot easier. Sometimes getting doing a water only fast can be like, so it hits you really hard, you know. But yeah, when I kicked it off, which was on Monday, now it's Thursday. You know, it's been, it's been much more smooth. So I always do that because of the health benefits. It's not a good way to lose weight because you basically

David Siegel 06:50
don't recommend the pre juicing at all. That's carbs, and you're going to be low on protein going into a four day fast. You're already seven days low on protein. So I would say you're past your limit and you're starting to lose muscle. Yeah, day five is when a lean person will start to lose muscle. Day six and seven is when a heavier person will start to lose muscle. Yeah, that, that's a good

Andrew Stotz 07:16
point. And I can see, you know, I,

David Siegel 07:19
I'm, I'm debating about it, what, what it helped me with was just easing into it. But definitely, you could also argue that there's no need to do five days. Three days would bring autophagy. Three days is great. Yeah, so days are great, but now you're getting me to start wanting to eat lunch. David, protein go get yourself a protein shake. You're low on protein right now. Definitely. Okay. Yeah, great. And, and, by the way, just so people know, my recommendation is one gram of protein per day per pound of ideal body weight. So about roughly two grams per kilo of ideal body weight per day, every day. It's a lot and it really helps.

Andrew Stotz 08:01
You know, it's hard to get that. I mean, it is very hard, and particularly as you get older, it's like my ability to bring in a lot of food into my gut is much lower than it was like when I was young. I could just have a

David Siegel 08:13
program for doing that. I have a program for doing that, and also for building bone, because you're losing bone if you're not building bone. Yeah. Well, no, I'm

Andrew Stotz 08:22
the link in the show notes, and that's that's definitely interesting. But let me introduce you to the audience. Not everybody knows you and sir. David is a Silicon Valley entrepreneur who has started more than a dozen companies. He has written five books on technology and business. He was once a candidate to be the dean of Stanford Business School, and is now an AI thought leader, meaning an AI startup that he hopes will pave the way for the agentic economy, and he helps companies convert more traffic into sales for a fraction of the cost of humans. And that's why you got to drop everything, ladies and gentlemen. So tell us what you're doing.

David Siegel 08:58
Well, let's just talk with the big picture companies. Are we? Are we are not. I don't believe we're in a bubble. I don't really believe bubbles ever exist. I think that when you put real money into it, it means you think you're going to make money. And if you'd bought at the top of the tech wreck, at the bottom of the tech wreck, or, sorry, at the top, when you said it was a bubble just before the record, it's end of 1999 you would have had a fantastic return now, would have beaten the S and P Now if you'd bought at the top. So we can't call bubbles when we're in them, and there really aren't any, and we're not in one now, and companies need to drop everything, and that is not going to be relevant to the AI economy in the next six months. So look out six months. Look at all your projects that you're doing that won't be, will be irrelevant, and drop them now, instead of being forced to do it later.

Andrew Stotz 09:54
And when you think about, when I think about AI, you know, I mean, I, I feel like it's my it's. My My lover. I work with her every day. Sometimes she gets me really upset. Do you do fight a little bit? Yeah, sometimes she brings me pleasure. I even at one point wrote to chat GPT and said, I want a refund. This is defective. Yeah, for a month, and then I, I ended up, you know, having to give up and go back on it and, you know, go, re enter the battle. But when you're talking about, like, drop everything in, you know, focus on AI. What is AI? Anyways? I mean, for me, it's like, a, it's a, definitely an editor, yeah. I mean, it does that. But, I mean, you're not talking about that. You're talking about, you know, revolutionizing the business. I'm assuming it's a

David Siegel 10:43
knowledge worker. I'm writing a screenplay with it right now. I've written several business plans, and I always end up rewriting them, but it always gives me the framework and does the homework and does the research and helps me. I've written several articles where I keep asking it to fill in this paragraph, and it does that. And then I put, so I'm the architect, and it's the builder. It's, it's doing, I'd say, I say, use AI first all the time. Get AI to do the hard work for you. So don't abandon it and say, Okay, I got it from here, and I'll do the rest by hand. Keep prompting until you get what you want. You can even, you can even take what you've got, put it into a document, and then say, Now redo this section, because I forget, they'll say, here's a section. And redo the section. Then it'll give you that you keep kind of but at the end of the day, if you have a good one, it'll often have enough memory to spit out the whole thing, right? And you can also ask it to summarize everything you've been doing for the last two days and put it into a summary. Edit that summary down with it, and then get it to regenerate so that whatever it forgot, you can tend to kind of bring back by forcing it to do all that work.

Andrew Stotz 11:53
You used a term that I remember Peter Drucker published in 1965 in the effective executive called a knowledge worker.

David Siegel 12:01
Yeah, yeah. And I'll tell you something funny, because people don't really know this, an LLM large language model, which we mostly use is just predicts the next word. That's all it does. It happens to be very good, and most of those next words are good. You notice that it hallucinates. You can get it to reduce hallucination. And I have a prompting course on my two hour Executive Education course on AI, which you'll link to. It's the reset at my website, the great AI reset. And one of the things people don't know about is something called temperature. You can say set at temp to some value between zero and two. It comes set at one, where you get a lot of hallucinations. But if you want many fewer hallucinations, you can say set at temp point five, and it will give you many fewer hallucinations for a while, until it wears off, or you can get it really go crazy and give you, you know, if you want to do a wild and crazy story that tell it to say, temp equals two, and it'll just take it and run with it. So you can actually modulate that. And there's a lot more you can do in your prompts. I want people to develop a personal prompt and a system prompt that they put in at the beginning of every day. And for example, I say use a Spartan tone. Just by saying those four words, use a Spartan tone. It cuts down on lots of the car garbage. You're going to get out lots of the verbiage.

Andrew Stotz 13:29
And I'm at, I'm at your website, red shift labs.io/reset, and that's the video series, yep, the AI reset video, course. Can you just say what? What people get if they go to this?

David Siegel 13:43
This is a business course. Yep, there's quite a few new ideas here that you won't get anywhere else. There is how ll albums work. There is how agents work. And you can see examples of agents. You can see how a web app works, which is how our web app works. So you'll see a video on that, but we're going to do a quick demo just to show everybody. And then the drop everything section. And then there's a the prompting class, drop everything, and what are the implications for society, and what about the dangers? And then the final one is an essay on AGI, which is the holy grail. When, when one program is the best knowledge worker in the world across all categories. And I have a big essay on why that's a little bit misunderstood, and why humans just aren't as smart as we think we are, and so kind of, as far as I'm concerned, we're basically at AGI already, because the llms aren't that good, but we're worse. And you just has to outrun the bear, not, not you just has to outrun you, not the bear.

Andrew Stotz 14:52
Yeah, and the, if I look at, for instance, my coffee business, you know, it's a factory. It's to B to B business. Supplying hotels, restaurants, coffee shops, offices. I've got a sales team, I've got a management team. I've got a group of workers. We're roasting coffee every day, physically delivering that product, servicing the machine, selling the machines. You know, it's, it's, it's on the ground, you know thing, and already, you know, everybody who can is using AI to help them with their writing, and, you know, with a bunch of stuff. So, you know, that's kind of basics ABC. But when you look at your course, and you look at what you've been talking about, what are the next steps? I mean, I'm not sure if it's that clear to me, how sure.

David Siegel 15:46
Yeah, it's not easy. For example, the back office is going to revolutionize. They're going to be companies that are you're used to a bunch of back office applications that are very brittle. You have to put everything in the right number and everything in place, and then it'll spit out what you want. And with AI, you can just say, Can you fix that? Can you rearrange that? It's going to be much looser. And it will deal with partial data or scrambled up data or unformatted data, and it'll put it all together, so a CRM or your general ledger, or your accounts payable, all that stuff, you'll just talk to it like you talk to an expert who can do that. So it's kind of like having a room full of people who are really good at what they do, white collar workers, and just talking to them and telling them what to do. And we're having conversations say, you know, what can we do to minimize our tax exposure for next year? And it will come back with that. And most of these pack, you know, packages for, you know, back offices are never going to do that. Then you have to talk to some $600 an hour accountant to do that.

Andrew Stotz 16:48
And when I think about my accounting, you know, I have a credible team that closes the books on time every time, every month, and we close the books monthly for 30 years. So, like we, we understand accounting and finance, and basically it's a brutal task, really, when you think about it, the paperwork that's involved, stuff within our accounting system, chasing down all the little things. Yeah, and you know, you know, we have recipes, we have loss, we have this is it properly accounted for? We've got workers. We're allocating costs. I mean, it is a huge bear. And then it's all going to be put into a structured database, exactly. And then from that, we're able to really get an incredible amount of information from it. So it's hard for me to see, for instance, that AI is going to replace that,

Speaker 1 17:38
it'll replace that. I just can't see it. How is that going to happen?

David Siegel 17:43
Absolutely the same way that your people have learned it, it will learn from them, and it will just take it over. That'll be the this is the low hanging fruit. This is going to be the easy stuff. I know it sounds complicated to you, and there's a lot of little things, things to, you know, clean up at the end of every month, but it'll just do that. This is going to be the easy stuff, and harder stuff will be. Will be stuff like cost benefit, should you open another should you take a new account? Should you expand? Should you get a new supplier? You know, should you do capex? You know, bit hard business decisions is going to be trickier, but this blocking and tackling of routine stuff every month is just going to go down in the next 12 months.

Andrew Stotz 18:27
And, yeah, I mean, I would love to think about how we continue to keep our accounting at the cutting edge, because accounting and finance is, you know, the ability to really understand the flowing of blood in the system. Yeah. And, you know? And you could imagine, if a company could really implement that, it would be some competitive advantage at driving down costs, because there's a huge amount of cost spent, particularly in companies that don't have their accounting that strong. So that's one area. What about you

David Siegel 18:55
even better? It'll say, you know, we can manage your debt better. We can get you better. We could look for better interest rates. We could manage your cash flow. Look, we could save a million dollars here, or, you know, there,

Andrew Stotz 19:08
I understand that, where I can put my information into it and say, Help me think about such and such. But the actual compiling of the information, that's hard to see,

David Siegel 19:21
you know, but why? Why am I saying it'll do it because it's such a common need. We're talking about a trillion dollar business, almost. Oh, yeah, yeah, right. If you don't think there's 30 startups doing this, there are more, right? So you're gonna see demos of this, and then, and then you'll go to their website, and you'll say, but my business is different, and it'll have its own AI bot that we'll probably make that'll say, Fine, download all your information, tell me about your system, and I'll just make a demo for you right now, and beat what you've got already, and it'll do that in five minutes.

Andrew Stotz 19:55
Yeah. And then let's talk about I know we're gonna talk. A little bit about sales and all that. But I'd like to talk about marketing, because that's also it's a different thing where, you know, we need to get a clear picture of our avatar and make sure that we got our target market really clear, and then it's about marketing campaigns and all that. And you know, there's so much emotion involved in that and creativity. Is it going to do that in marketing?

David Siegel 20:21
No, it's already done. It's done all what I call the Cialdini mind tricks, all of the teasers, the hooks. This exactly I'm talking I'm mentioning Cialdini for a reason. The you know, Russell Brunson talks about hook story offer, all this stuff has been done. And it can watch Tiktok and Facebook and all these flows for what's trending. And it can make its own ad sets. It can make its own copy, and it can just experiment and do AB tests before you wake up in the morning, it's already knows what's the best mix for that day and what hook is working. And then by the end of the night, it'll, it'll know what to do for the next day.

Andrew Stotz 21:11
And is this just like chat GPT, or is this a specialized

David Siegel 21:15
there's going to be specialized platform for doing this, for sure. Yeah. And there's a lot of is agentic, which means you're, you're coding up a bot that will go out and and scrape and learn and then put databases together of things, and it will manage 100 200 different ad sets, monitor the the effectiveness, get away, get rid of the stuff that's not working, and Just continually do this. So that's that's an agent, which GPT is not, right? GPT is a question answering service.

Andrew Stotz 21:48
And just one of the things that I like about the stock market, or that maybe I don't necessarily like about it, but it's the reality of it is that as soon as a new idea comes out, or a new concept like, I think the Fed's going to reduce interest rates. As an example, everybody trades it as soon as the information gets out. And then the efficiency is gone, the gain is gone, because everything is a relative gain. And so, you know what? And the way people try to get an edge is, you know, to be faster on to an idea, to see a vision of something that other people don't see, invest in that and be right. And then the market catches up. You know, to what extent are we going to live in this world where, yeah, okay, the next 12 months, there's going to be companies that are just going to give up and they're going to get knocked out, but then the ones that remain, they're all going to be applying these same tools, and all of a sudden, we just raised up, and then AI is not as effective as it used to be.

David Siegel 22:42
Hold on. First of all, that's generally true, and we've been living with that for 1000 years. So we're rat we ratchet up the economy, and that's how the economy grows. Second, your edge is no longer. Your ability to execute your edge is how well you know your customer. Your edge is how many interesting experiments you can throw at your customers and measure what their reaction is. It's no longer about focus groups or questionnaires. It's about, you know, coming up with stuff and throwing it in front of them and seeing if they buy. And the more you know about your customers, the more you'll be able to execute easily and get an edge over the other guys, because you have data that they don't, and you may have insights that they don't,

Andrew Stotz 23:31
that will be an edge. And what's the other thing that I see about AI that gets me always wondering is that you said something when you were talking about redshift labs.io, reset, and that is, that's information that you know is not out. There is and people don't know it well. No, AI's already crawled it. They've already watched all of it, and they've brought it all into their Centralized Information System. And, no, it's no longer your great idea. David, unfortunately, it's gone

David Siegel 24:03
kind of first of all, let's understand how they train. They train right now in a big training session that lasts about three months and cost three four months. Cost about a billion dollars. Grok for is just out of training and is now in the reinforcement learning phase. They will ship grok for in the next four weeks, and that sits close to a billion dollars. So grok four will have trained on those but GPT five will not have because GPT five stopped training last June or July, and so it will be in their weights, and I'm a pretty small voice, and I'm pretty contrarian, so it's basically a consensus machine. The more it hears from the mainstream voices, is more going to influence what it tells you. But if you said to it, and this is going to apply to grok for because it just finished. Training. What does David Siegel think about the AI bubble or this and that? Then it will tell you. So I take my famous, my favorite economist, Milton Friedman. I say, you know, what would Milton Friedman say about the interest rate drop? What would Brian Kaplan say about the immigration situation? I'm always using people what? What would Richard Feynman say about this new discovery? What would Dr Deming say about systems thinking? What would Dr Deming say Dr Edwards W Deming say about this because, and that gets me to something very interesting, because his work was very much about optimization, which ultimately led to what we would call the Lean revolution. Lean businesses straight line everything that was crooked and rung out inefficiencies in processes. And you've probably used a lot of that methodology in your coffee business to straight line everything. And now and Drucker would agree with this. Now I think Lean is dead. I think the only thing because Lean and Agile are opposites, the more lean you are, the less agile you are, because the more you're investing in optimizing your processes. And agile is about throwing processes away and doing new business, doing new things, new discoveries, new innovations, right? And so I think we're out of the age of lean and into the age of fully agile, which is why I say that six months is your new time horizon. Don't plan anything longer than six months. There's no crystal ball that goes that's even a long time right now.

Andrew Stotz 26:39
Okay, so you've terrified us all, which is, Okay, it's good, yeah, and, but the question is, what's the next thing I should do? I mean, I've got my romance going on, and, you know, we dance every day. I've just finished a dance this morning with my AI tools I use, I use four different I can see the lipstick on your cheek exactly, and, and, and the bruise on the side of my head and, but, you know, I use four different ones, and I go back and say this one said my girlfriend here said this. What do you think? And you know, and you know, that helps me. But the question is, what's my next step?

David Siegel 27:17
Okay, drop everything that's not going to be relevant in six months, including the people in your organization who resist those and the new the new McKinsey report that came out in on the fifth of October, said companies that are much more forward at the executive level on AI, are doing much better, and companies that have laggards in the middle are getting held behind. So you might need to let go of five or 10% of your people who are holding everybody else back. Second, you need to train the trainers. You do not need a whole new group of people. You do not need to fire all your people and hire some really expensive AI geeks. That is not going to happen, and it's not going to be healthy anyway, right? You want to keep your culture, but evolve it to becoming more agile and less lean. I mean, this is really the whole thing. Like innovation covers a lot of things besides AI and AI will bring many innovations that are not just AI. Be prepared for a time of rapid innovation through training, the trainers get your trainers get your top 10 people. Let's say you have 100 people in your company, 10 of those people, those people should go to a boot camp like mine, or there's several get trained, build their skills, build their prompting libraries, their methodologies, understand which platforms to start using, and get those people inside your company to do the rest of the training. You don't have to outsource to some expensive this does not have to be expensive. This is 5% of your people getting trained by relatively expensive people for a week, and then back in and help everybody set up their new systems, which is a lot about experiments. So we're gonna, we're gonna can the stuff that we know we can see is just not going to be relevant, and we're going to take that money or those resources and dedicate 30% of our budget, or of our, let's say, of our 50% of our expendable budget, our budget that we can play with and dedicated to small experiments where we're looking for quick win, and we're thinking like a startup, no matter how big your company is, because that's where we're going to be. And build a lab where you're trying things. You know, I talked about, there's going to be, say, 10 companies that could provide your back office software. Well, we don't know anything about them, so you're going to have to dedicate some people to try to figure out and play with them and do and do some testing and see if they can do it, because there's a lot of claims and a lot of garbage out there. Yeah, yeah. Everybody's got some AI. Every company who's got a traditional system now has AI on top. Up, right? And most of that will fail. So you want to be looking for the new guys who just got their $10 million a round, or seed round, who are who already have a few reference clients. And you can say, all right, yeah, let's try that and see if it works for us.

Andrew Stotz 30:18
So what you're talking about is take one person or a couple of people from your organization, and put them into a boot camp, a training, get them to understand yours, any others that they're going to understand what's available. How can we use this? How do we put this into practice? Methodologies?

David Siegel 30:37
Yep, and then them to have a playbook that they can bring back, right? It's not a road map, because road maps are pretty much out right? It's a playbook. It's how to be more agile. And I give you an example of capital. One is a company that you may know is built on experiments, and their rule inside the company is, if your experiment doesn't have a control, it's not an experiment, and you can be fired for not having a control. You have to learn how you can't just say, Oh, well, we're doing experiments. No, you're not. You got to learn what an experiment really is and how to get the data out of it. It's true in marketing, but it's also true in trying all these different things that are going to lead you out of the repetitive, the repetitive white collar work that you are going to get rid of in the next 12 months. You're going to do that by experimenting and getting good data on which what works best,

Andrew Stotz 31:32
and is there a particular area in a business that you think is the best place to start? You know, I know you. We you show me in I think we're going to look at like the website, you know, website tools. But is there a particular area you'd say this is a good place to start?

David Siegel 31:48
Yes, yes. Where's your pain? Like I talked with companies. I'm talking mostly with enterprise companies, and they've got 200 500 800 people on the phones all day in a call center in Kerala, all right? There's a lot of pain there, because these people speak with an accent. They only speak so many languages. There's a lot of frustration, nobody, nobody on either side likes it, right? The customers don't like it and the reps don't like it, right? That's, that's, that's a huge pain point that's just going to go away right, very soon. So they're gonna have to figure out something else to do in Kerala, which that's just the reality. Because com, talk to a CEO the other day, how much you spending? Well, I got 200 people on the phones. Well, how would you like to go down to like, one person who just manages the system? Oh, my God, you can do that. Oh yes, we can do that. This is not rocket science at this point, I don't think so. Where's your pain? You know, you might have pain somewhere else. Might be in manufacturing, might be in distribution, might be, I don't know. You know, going to that.

Andrew Stotz 32:49
All I want is to take all the market share from my competitors. That's my pain.

David Siegel 32:55
That's not pain. That's opportunity. Yeah.

Andrew Stotz 32:58
So first pain is, I'm not getting it. Where's your

David Siegel 33:01
real pain? And second of all, to do exactly that, as I've mentioned, you're going to need to know everything about their customers, right? It's going to have to be very niche customer base. So what you're saying to me is you know your customers now you don't necessarily know their customers as well as they know their customers, right? The goal is to get to know their customers, one at a time, as well or better than their customers, and make a pitch to them that's gets them to say, Oh, that's a better story than the story we're listening to over here.

Andrew Stotz 33:38
And they have 1000 customers, and since all their teams using AI, what probably happened is they're uploading their customer list in AI, and then I can extract it.

David Siegel 33:48
Take this. Take a low hanging fruit. Take the ones who are pissed, right? Take the ones who are not being served. Make sure. Let's say that's 100 of them, smaller and smaller,

Andrew Stotz 34:01
yeah, let's say that's 100 of them right now. But the challenge I have is I don't know who they are and where they are. How do I use AI to say I got to

David Siegel 34:09
get though, that's their edge. So now you're like a startup in that regard, with that new customer set you're under, you're a startup, right? So you do what startups do? You call them, you talk to them, you ask them about their pain. You say, Well, can we try something? What? What can we build for you that would be custom? That would be two orders of magnitude better than what you're getting from somebody else. You're gonna have to say, the one thing you don't do is call them and say, Well, how about our existing deal right now that you've known about for five years already? That's not going to fly,

Andrew Stotz 34:43
huh? Can AI call them?

David Siegel 34:47
Not really, not for discovery. Call like this right now. No. AI can call a list of people where you know the script,

Andrew Stotz 34:54
right? Can AI find them?

David Siegel 34:57
I use AI to find them all the time. And. I'll say, I don't want their names. I want their names and their email addresses, and give me the email to send. And when I when you send an email, there's a there's a important concept of email, of cold email, called Show me you know me, for every person with an email address, give me that intro line and that subject that hooks them, because you went to Harvard, and they went to Harvard, you went to this event, and they went, you know, something like that, that gets them to open it, because that'll, that'll triple your opening rate. And then let AI become your CRM and hook it to, what are these various email, you know, systems, and let AI custom make each and every message going out.

Andrew Stotz 35:46
You know, one of the feelings that I have when I hear people like yourself talking about it is that it's just overwhelming. It is and it just feel like, okay, yeah, do this, do that, do this, do that, and then you look at it, and then you think, Okay, I'm eight hours into doing that. I thought it was going to be an hour of me getting emails, and instead it's eight hours of going list was wrong, and this was wrong, and I got to go back, and I got to rewrite the prompt, and then it's like, oh, yeah, this wasn't like, so so many people annoy the crap out of me because they like, yeah, just do this. And it's like, every one of these things is a project.

David Siegel 36:22
Two important things about that. Number one, right now, at the end of 2025 and beginning of 2026 you need a guy. You need a gal. You need a person who's going to wrangle this and do it and build the agents and do all that. In six, 810, months, you won't you'll use an AI agent who will replace that person, and you'll talk to that agent, and it will do all that heavy loading.

Andrew Stotz 36:46
And how do I find that person?

David Siegel 36:49
Right now, it's hard, but that's where we are right now. There are places where people are hanging out with AI skills who just had their startup fail or don't like what, you know, they've built their skills in a bigger organization. They want to be more agile.

Andrew Stotz 37:06
So maybe, maybe, as an owner, I should just find a smart young kid who's totally into it, put them next to me and say, how do we, you know, every single day, improve, improve, improve. Yeah, maybe that's actually an inspiring thing. Idea from this, yep, it's a great idea.

David Siegel 37:24
Yeah, first they will make ai do the work instead of do the hand work. Yeah. In fact, if you can find somebody, you could imagine two people, kind of a business analyst, person who can help you know what the objective is and how to go implement it. And then you could have an right now you would need an agent creator, somebody who knows how to build agents like at n 8n and I have a bunch of examples of how that works on my you need a person from that world who builds those right now and then again, in six to 12 months, there are the person who does that will not be a person. It'll just be an AI agent who builds the AI agents. Everybody knows this. And right now we're kind of in this half and half period. So you kind of need two people.

Andrew Stotz 38:18
You described an AI agent. What was the other one? I should just say an AI fanatic. Or what do you call that? An AI

David Siegel 38:24
business analyst, person who can, who's good with prompting, who's good with who gets results, who's got a good history of building things right, and understands and you can train, you know, you need more technical skills and business skills right at the moment, yeah, and then that person should graduate by the year from now, that person will be doing much higher level stuff, because that that most of that sort of day to day work will get done.

Andrew Stotz 38:53
Okay, well, that's a lot of good stuff so far. What else do you want to share with us?

David Siegel 38:57
Well, let me show you a little demo, just for fun. All right, you'll like this. So this is the pro mix website. It's a high end nutritional supplement company, and we're not even in the website. We're on top of it. This is a frame on top. And this is my agent, Byron, and I'm going to play and I think you'll be able to hear the sound. Hey, Byron, I want you to meet Andrew. He's in Singapore. We want you to give us a tour of the pro mix website. Hello, Andrew. It's a pleasure. Great. Come on. Let's hear it. Say it again, please, Byron,

David Siegel 39:42
are you hearing it, Andrew, I'm not.

Andrew Stotz 39:44
I heard it earlier, but that now I'm not hearing it. Try it again. Okay, yeah, hold on, it's working. In other words, I think I'm in Thailand.

David Siegel 39:56
Oh, he's in Thailand. Oh, that's right. Oh, my gosh, yes. Hey, Byron, I'm. Here with Andrew. He's in, he's in Thailand, and we're talking, we want to give you, have you give us a tour of the pro mix website.

David Siegel 40:12
Oh, great. Now he's not going to work. Come on. We just had it going. Let's test Hey, Byron, can you hear me? I have had this happen. You know what? I need to restart my computer, and that's not we can do it later. So let me give it one last try, because it was just working. Yeah, but now it's tired Byron, are you there? No, I'll have to take it out. I'm sorry, but it is on the so we'll just have to segue to the website. Sorry about that. That's okay. Annoying. This happened to me once, but it's just because I have to restart. Can you hear me? Yep. Oh, Byron. I wonder. Oh, Byron, can even hear my you know, I made that change to my audio. I wonder if that's the channel. I'm not. I'm not sure. I can't even type, click in and type. So we're gonna have to scrub that. I think it had to do with that change, but I'm not sure.

Andrew Stotz 41:21
Okay, so let's, let's now, you know, we'll get to the tail end now. So we're going to wrap up any last thing. So what we're going to do is, I'm going to say, we're going to start the we're going to clip out that part, and we're going to start our regular conversation now.

David Siegel 41:37
All right, so let's let, I want to talk about the agentic economy, which is what's coming next. Great. All right, so first of all, you'll be able to go on my site, on my reset site, and see a full demo of my system. And we won't take time to do that, because I want people to see how the system works. And then there's a diagram that explains what a web app is and how it all works. So that's an important sort of exercise for people to do as homework. Next comes the agentic economy. And if you think about it, people are starting to use their AIS for shopping already, and already you can shop using it'll do comparisons, and then you can choose the thing that's at Amazon or the thing that's at Etsy or some other little website you've never heard of and you like it more, and it says this is the one I recommend, whatever. And you can buy it through stripe integration or PayPal integration, right through the LM, never go to the website. Now, does Amazon care first of all, no, because they're selling you the thing anyway, and they're delivering it so they you're not using their app or their website. They don't care. They're using the API, and they're getting the order. So, they don't care. They want but companies want to get found in this shopping experience, because you have more leverage now. You're no longer typing in keywords and getting SEO gamed search results that are just again, you know, an arms race that everybody's playing all the time with, just salting in keywords that's not adding any value, right? So then you're clicking on websites, and then you fill out a form, and then you've got to give it your address and everything this way is going to just get a lot easier, and it's going to get more and more common for not only consumers, but for B to B buyers to do head to head, apples to apples comparisons, right in the LLM, right. So what's the company response? Well, well, right now the company response is a I O, which is, again, salting keywords and stories and information into all the Reddits and into Wikipedia and wherever they're. Kind of the watering holes are for the llms, wherever they go. You know, when they say searching, it's looking around. So they're going to look wherever those places are and try to pump those sources with their rhetoric. And this is, again, what I call the Cialdini mind tricks of using sensational words to get at the top of this. Again, It's an Arms Race, right? And everybody's clambering on top of each other to try to get to the top of that pile and be visible. But then my view is that when, when websites, and a lot of people are doing a lot of keywords on their websites that they hope will attract AI, in my view, and this is kind of a something I'm entitled to, because I created websites in 1994 I wrote the first book on what a website is and how to build them, and helped the first million people build their own website. So now my claim is that we don't need websites anymore. Websites are now the problem, and Google searches and SEO and AIO are the problem. Problem, and we're going to get pretty quickly. If you look at the trajectories of the last two years, things tend to go faster than slower, to the new agenda economy, which is where, and I hope to provide some of the infrastructure to this, because it doesn't exist right now, where the the marketing, messaging and storytelling are no longer useful because the buyer is an AI, and so storytelling and emotional hooks are no longer going to work, and false scarcity and all the tricks of you better buy it now, because prices are going up at midnight and all this stuff is going to go away, and what we will have, I hope, is a head to head compare, comparison of offers, so that the only way you'll compete is through a better offer. I don't mean a better price. That's kind of a you can think of that as like a race to the bottom for the worst price, and then people are going to get garbage. And that's not going to work. I'm talking about your offer. Your offer is the whole package of what they get, what the service is, what the support is, what the returns, return policy and the return efficiency and your your ratings from other people, and what other people say all your, you know, testimonials, all this will be compared apples to apples, head to head against your competitors, and the AI, soon enough, will just make the decision, you know, pretty already, you're saying, you know, can you just find us an Asian restaurant in Midtown, you know, and make book us for six people? And it just says, Okay, you're going to this place, right? You know, it's, it's like, he doesn't have to give you six and you choose, it's just going to choose. The agents will do that for your coffee service, or for getting an airplane ticket or booking an entire trip, or for choosing an accounting system, etc, etc, your marketing tricks no longer work on AI that, and that's what we're building for. That's what we I'm looking forward to know not having mind tricks, but to having conversations with companies about their offers and how we can make a better offer that sticks with this particular audience, so that you don't care if you don't show up on a whole bunch of searches, and you do care if you end up head to head with certain competitors for a certain thing, and then you want the offer. Could even negotiate right there what the price is. And in fact, and this is interesting, you may not have heard about this, but companies are now using AI to do different pricing for the same products at online grocery stores. So there's, there's experiments where 100 people do the exact same shopping and put the shop same shopping basket together, and they come out with a different total by about 10% because AI is looking at their previous history and figured out what they can get away with charging more for the exact same product, right? You know, there's, there's like an 80 cent differential in the price of the same in the same eggs, dozen of eggs, different people are going to get different prices. And so this is a new kind of arms race, where it's based not only on your offer, but on the buying behavior and the negotiation between the two agents, and then the shopping cart or the product or the whatever, or the the trip or whatever, it's just going to show up for the customer. The customer is like, I want a trip, you know, I don't want too many choices. This is how much I want to spend, or I need a new, you know, appliance, or dishwasher or whatever, just go buy it. People. Most people don't like shopping, and so they'll just wave their hands and it will just buy it based on the offer. And there's all of that marketing stuff in the books behind you goes away.

Andrew Stotz 48:56
Well, that means next time we meet, we're going to be on the beach.

David Siegel 49:01
We might be, I might be building the next generation of AI infrastructure, because there's so much to be done

Andrew Stotz 49:07
yet, but I still work to be done, but to com So

David Siegel 49:11
plenty of I mean, things are accelerating faster and faster, and so the next five to 10 years are going to be very exciting. And as we say in AI now, and I want everybody to understand this, things will never go as slowly as they are going now, right? If you think it's going fast now, wait six months.

Andrew Stotz 49:30
Yeah, the train is going to rev up. It's accelerating. Well, there's a lot of stuff that we covered, and I want to wrap it up with some takeaways. The first one is, you know, go to redshift labs.io/reset, which I'll have a link in, and watch the course, I haven't, I haven't watched it yet, so I'm definitely going to go through it. And what else would you like to leave?

David Siegel 49:54
The listeners, all viewers, drop the stuff. Get aggressive and drop the stuff that isn't going to pay to be worth. Worth anything, and get 5% of your people and get them trained to train everybody else, and dedicate 1020, 25% of your budget to doing experiments, to finding new ground, new land that you can take in an agile way. And forget about optimizing anything, because we're not going to be optimizing for years now. Okay, we're going to be scrambling for years, so get good at scrambling. Excellent.

Andrew Stotz 50:28
And my takeaway is, I'm going to, I'm going to look for that AI, that young AI, I won't call it expert, because nobody's really an expert in it these days, because he just keeps changing. But that passionate young AI person that I can get with me and my team, and think about, how do we start really taking it more seriously? And so that's, that's a big takeaway from myself.

David Siegel 50:51
So and then combine that with right now, somebody who builds agents, because you need somebody right now who builds agents. And there, if you go to n8 n.com you can find people who are building agents and putting their examples of their work into the public domain as free templates. And those are good people. You can run them. You can see how they go, and then you can contact them. And many of them are in Pakistan, not surprisingly, or maybe in some in Thailand. And those are the people who help you build the tools you want to have

Andrew Stotz 51:21
excellent Well, I want to thank you for coming on now a third time and sharing what you've got going on in your life. And it's very, very interesting. Do you have any parting words for the audience?

David Siegel 51:34
I think it's a time to think to be younger and more energetic and more risk taking. It is not a time to add AI to your old stuff. It is a time to look for new opportunities that are going to be Yeah, we talked last week just briefly about like, Well, what happens when it takes all the jobs? You know? What happens? People think it's going to take all the jobs, but they're thinking with the mindset that not nothing else will change. It will just take all the jobs. But that's not true. There will be many new problems, and whenever there are new problems, there's a new economic opportunity for many, many people. So very much like previous tech waves, innovation waves, that these problems, these solutions we're creating now will create new problems. Many of them might just be leisure time, you know, how do I deal with that? That's fine. That's a problem. So you just keep looking for these new problems that didn't exist six months ago and jump in after them. You can get, you know, kind of younger and more excited and think more like a 25 year old startup person than the person who's just doing things the way they always have, because that is that will make all the difference.

Andrew Stotz 52:49
Think about creating a food supply business for the 1 million workers that are operating in space.

David Siegel 52:58
There you go. I'm not big on space. Actually, I'm not big on space. I'm negative on space, on humans in space.

Andrew Stotz 53:05
Yeah, it seems a little, seems a bit of a stretch. And after reading endurance about Ernest Shackleton, I thought, well, if you think you can survive on Mars, why don't you just go and figure out how to survive in winters of the Antarctic, and if you can come up with that's just constantly against you, and you can come up with a good way to survive and thrive in that environment and then bring that to Mars. But anyways, that's there's smarter people than me thinking that that can be done. But anyways, that's a great book.

David Siegel 53:36
Don't like humans in space. Sorry, yeah, all right.

Andrew Stotz 53:39
Well, that's a wrap. That was a great discussion. I appreciate it very much. This is your worst podcast host, Andrew Stotz saying, I'll see you on the upside. You.

Andrew Stotz 00:01
Matt, Hello, fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, and I want to thank my listeners in Georgia, in specifically Atlanta, Georgia, for joining us today, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guest, John Austin. John, are you ready to join the mission? Hey, excited to be here, Andrew, yeah. Well, I want to introduce you to the audience. So let me do that right now. John is the founder and CEO of Fran bridge consulting, a two time Inc 5000 company, and he is a top 1% franchise consultant. John is also the author of the best selling book, non food franchising. John draws on his experience as a former Inc 500 franchise president and multi brand franchisee in helping his clients select their franchise investments. John, take a minute and tell us about the unique value you are bringing to this wonderful world.

Jon Ostenson 01:16
Yeah, absolutely you know, Andrew. I love what I do, and I get to every day, help entrepreneurs across North America and sometimes even internationally, step into business ownership. And what I do is I introduce them to a wide variety of different opportunities that we feel strongly about, that are open and looking to grow in their market, and help guide them through the process of exploration and help them understand that there's so many different paths to business ownership. And, yeah, just love the case studies and helping our clients step into what they've always thought about, what they've always dreamed about, but oftentimes didn't know how to make happen, and that is stepping into business ownership.

Andrew Stotz 01:53
Yeah, it's such a interesting topic. And there's two parts that I was thinking about when I looked at non food franchises, because I thought, wait a minute, there's non food franchises. That was my first thing that I had in my head. Oh, yeah. You know, it could be a laundromat, or it could be a such and such. But give us some examples of what are some of the non food franchises or franchises that people would get? Yeah.

Jon Ostenson 02:18
And I'll start by saying, We've got nothing against the food guys. We love them. We need them. But my humble belief is there are easier ways to make money, and I'm more than happy to get into the reasons why, but no some of the areas that we see people resonate with today. It's a wide variety of different industries that oftentimes don't coincide at all with their backgrounds. They're bringing transferable skill sets, but not industry knowledge, into these opportunities, and it's everything from home and property services, so many different niches within that space, a lot of smart money getting involved there. It's industries like health and wellness opportunities and categories like kids or pets or the senior space. You know, everyone's the aging population, you know, catering to that in different capacities, certainly B to B services as well, which resonates with a lot of background. So, you know, I'd say that trend that we see, and I don't like the word trend, but the theme is understandable, cash flowing, businesses, things that aren't going out of style, that should stand the test of time.

Andrew Stotz 03:14
Yeah, that's interesting. I mean, out of, out of all of those, do you have any favorites that you think this is a, this is a really good one, and I've seen a lot. Or are they like your children? And they all are equal?

Jon Ostenson 03:27
Well, I'll show you the spectrum here. So some of the ones that I'm invested in. I've got an asphalt paving and line striping business. So, you know, parking lots. I've got another one that's temporary walls. Can, you know, containment walls around renovation projects and construction sites. So, you know, B to B businesses. There I was in Miami this weekend kicking off the launch of one that we're really excited about. Gary Breca, the health guru, is aligning with Tony Robbins. We actually had dinner at Gary's house. This is around a longevity franchise. It'll be a little heavier investment, but it's all around longevity biohacking. It's have all sorts of different types of devices and modalities in there, as well as your peptides and everything else. So yeah, we see a lot of interest in health and wellness. That's definitely been an area that people are asking

Andrew Stotz 04:09
about and and for you know, you've listed off some different ones that you're invested in. For a typical person, when they come in, they're probably going to end up thinking, I got to do one of these things. I'm assuming that there's not a vehicle for someone to say, I want to invest in five different franchises. They can't run them. But if they had to make a decision and say, you know, here's one that that you think is interesting, I'm just curious, where would you say the future is like, for instance, the aging population is interesting, but you know, that could also be a really challenging one with all regulations and, you know, all of that stuff. I'm just curious where you think the most interesting opportunity is, or the best one?

Jon Ostenson 04:50
Yeah, you know, I think the senior space is a great one, and, you know, certainly in home senior care. But there's also other franchises that cater to that space. There's one that we've got several clients plugged in. To right now that provides exercise and fitness and stretching services to senior facilities. They come around every week, you know, maybe a couple times a week, almost like an outsourced PE department, if you will, for these senior facilities. You know, that's a, that's a benefit business where you're providing benefit to the community, right? It's kind of a feel good business, recurring revenue. It's needs based, you know, they're always going to be paying for that type of service. So I'd say that's one that I'd point to right now. But some of these B to B services, ones too, whether it be insurance adjusting or cost mitigation, consulting, freight brokerage, again, things you wouldn't think about unless they're put right in front of your face.

Andrew Stotz 05:39
And you know, when you think about franchising, when you think about business in general, you're trying to think about, you know, what competitive advantage do I have here? Do I have some IP or some very unique way of doing something? And what I'm thinking about franchises is that I'm thinking that, well, in some cases, you may not have any super original, let's say intellectual property or something, but it's just that you've got an operating system that you can do better than all the rag tag competitors that are going to pop up in, let's just say physical PT, you know, physical therapy as an example. Or is it built around, you know, some particular unique advantage? Yeah, I'd say,

Jon Ostenson 06:20
you know, certainly there are proprietary elements of different businesses, but oftentimes, to your point, you know, the benefit is, you know, you may be going up against fragmented, unsophisticated competition out there, and you're able to come in and bring that powerhouse of a marketing team and the technology stack. Mean you're really starting on third base. It kind of fast forwards your path to profitability, into growth is because you've got a support team on the sideline in that franchisor supporting you or your operator. Oftentimes, people will put an operator in the business to run it allows you to not have to carry all the daily support water for that operator. But again, you have marketing that's been optimized for other locations already. You're able to step into technology stack. You don't have to go out and recreate the wheel. Maybe you've got the ability to buy in bulk for goods or services that you're procuring. It may or may not be a household name people oftentimes think of with food, brand is everything, right? Hotels, brand is everything. I mean, what about insulation? That's a $50 billion a year industry in the US, no one can name a brand of insulation, but there's some franchises that play in that space. So it's everything else that comes to the table, not just the brand.

Andrew Stotz 07:28
And 30 years ago, my best friend came to Thailand, and he said, Let's start a coffee factory. And so we started a coffee factory that's now 30 years old. And it was like, I mean literally cutting through the jungle outside of Bangkok to set up our factory. And, you know, I just think that everything start had to start from zero, and as a result, you know, we barely survived the first 10 years. You know, it's just like mistake after mistake, misunderstanding, problem, losing a customer. Financial crisis came and hit in 1997 it's like everything came to hit us. Now, luckily, he is unstoppable, and we were able to finance our pathway through that, you know, with our own, you know, our own resources. But you know, if I look at it now, I can definitely see the benefits of franchising in particular, one of the things that really is hard these days is marketing and sales. And if a franchise has a good system for marketing and sales, it's so valuable, I would think,

Jon Ostenson 08:36
yeah, and you've, you got the marketing sales component, you also have, you know, the product market fit has been established, right? There's other markets that are operating a similar business successfully. You can see their financials before you ever sign the agreement. Nothing's a sure thing. Do franchises ever go out of business? Absolutely. But a lot of times, it's on the operator, not the system. In many of those cases, one thing, I mean, during that time, Andrew, during that 10 year period, you know, you guys probably felt lonely oftentimes too, right? You're in business all by yourself. And you know, one of the benefits of franchise system that oftentimes gets overlooked is you've got this built in mastermind of other franchisees that are living the same thing, day in, day out, exchanging best practices, learning from each other. Amazing. So it does provide kind of that support network for you as well.

Andrew Stotz 09:16
And I'm sure that some friend franchise organizations promote that, whereas others just kind of leave their owners, you know, doing their own thing. Am I right in saying that there's a spectrum of

Jon Ostenson 09:29
that absolutely franchising is just like every other industry out there, and that you've got great players that provide great support, that lean in and drive the right behaviors, then you've got franchises that are not as strong. Maybe the leadership team doesn't have the experience coming in, and that's where we come in and try to help our clients identify the, again, the top opportunities in their market.

Andrew Stotz 09:49
And I'm assuming you're only us, or are you outside of us also? Or how do you how's your business go? Yeah, it's

Jon Ostenson 09:57
really focused on the US and Canada and. Both countries, but yeah, I'd love to do more internationally. I've in the last couple years, I've met with multiple international franchises during my travels abroad, but right now, we're not set up to it. Things are just very different in other countries, as you imagine, from a relation.

Andrew Stotz 10:14
So yeah, and I've seen some franchise come here, you know that have? You know, done pretty well, and I think it's interesting in for Thailand and other countries like us so well, that's a great introduction to what you're doing. 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 it, and then tell us about your story.

Jon Ostenson 10:40
Absolutely, you know, like so many of your listeners, Andrew, I had a long run in the corporate world, and, you know, very thankful for that experience, but always had that desire to get into business ownership. Never knew exactly what it looked like. And so my first, you know, shortly after leaving the corporate world, I started a company with a partner, and I was 60% he was 40% so I was the one running the day to day. And, you know, we built it up. I attracted a great leadership team. Really sold them on the vision of where we were taking the business. And the idea that I had that we built the business around, was kind of a marketing and sales component. We had a marketing team, and then we had a call center that would field inbound calls. And so the idea was we would make the phones ring for our clients, and then we would answer them and book appointments. And so we actually worked with franchises. Those were our clients, and we grew the business. We were doing a couple million a year, probably 4 million. Ballpark had about 35 employees. We're having a lot of fun. Great culture, great team. You know, again, this is my first true business ownership experience, but the one challenge the model wasn't profitable like I thought it would be. So we were busting our butts, but we weren't making any money. We're right around break even, and someone's even losing money, and for the efforts that we're putting in. Of course, I tried tweaking this and adjusting that, but really was just kicking the can down the road at not wanting to admit to the fact that the model may not be what I thought

Andrew Stotz 12:07
it was, and that's because you just couldn't get the price that you should have gotten. Or is it because the cost of, let's say, the staff was higher than you had expected?

Jon Ostenson 12:17
Yeah, you know, it was a combination of both of those things. I would say that the main culprit was we became too custom. So the idea was we'd be able to offer competitive pricing for a franchise system, because all their franchisees would be treated somewhat similarly, right? It's just rinse and repeat. However, all these franchisees were individual business, business owners and Oh, their market was unique, or they their staff was unique, so we needed to book calls a certain way, or this marketing doesn't work in that we got all that type of feedback, and we accepted that feedback, and we made adjustments. And as a result, we became too custom. We were doing a lot of things, and all of a sudden our pricing model didn't work. And so again, we made adjustments where we would pull back on the emphasis on marketing. Let's double down on the call center and our value proposition there, and try some new technology and constantly trying to add value, but we weren't able to get to the point of being able to charge the price that we needed to to make the model profitable.

Andrew Stotz 13:12
And now, with all of your experience, when you said the model wasn't profitable, what? What does profit? What does it mean if you were to say that this particular model is profitable. I mean, obviously there's super profits and then there's losses. But what does profitable mean to you?

Jon Ostenson 13:27
Yeah, I think when you're a business owner, you're looking at that monthly P and L, right? And it's what I call the oxygen of profitability, getting in the black, where you're not having to figure out, you know, where that next payroll is going to be funded by, you know, having to put your own money back in the game. So fortunately, my business partner and I were both solvent, and we kept the business going for a good while. But part of it was a pride thing, right? You know, again, here, this was my first venture. There was a lot of pride riding on the wanting to keep it going

Andrew Stotz 13:53
for sure. So how would you describe the lessons that you learned from this?

Jon Ostenson 13:59
Well, in hindsight, you know, I pulled the trigger on winding the business down. You know, didn't have a sexy exit found, but I'm really proud of how we handled it. We found homes for most of our employees, for most of our clients. You know, I look back, you know, feeling good about how we handled it, but it was an ego you know, shot to the ego lessons. I mean, really, the biggest one would be my appreciation for the franchise model. Again, I tried my own model. There hadn't been Product Market Fit established. And here with franchising, I just love that you can see historical results. You can talk to other owners who run the same business before you ever start the business yourself, right? And all the things that we just talked about that are the benefits. So I'd say that was my biggest takeaway, you know? And then, of course, there's certainly personal lessons that come out of an experience like that. You know, be able to humble yourself and admit when you're wrong and course correct, and use the P word pivot, yeah,

Andrew Stotz 14:53
I would say, you know, some of the things that I took away from that story was so one. Of the big pieces of advice I always give people who are doing startups or early stage businesses is close the books every month and on time and make sure they're accurate. We're not talking about just the P and L the balance sheet too, and they, you know, people say, Well, my accountant doesn't know how to do that. Then get another accountant. That's the core function of an accountant, and make sure that the finances are closed every single month, and then sit down and go through it. And that way, you can assess whether it's not profitable, you know, early on and then make your adjustments. And if those adjustments don't work well, then you've got, you know, a problem. There's a second thing that I have learned that I think is associated with this, and this is my $7.5 million revenue number. So I'm a financial analyst. I've looked at 26,000 companies worldwide. I've calculated average levels of profitabilities at the gross profit level, the operating profit level and the net profit level. And then I've calculated what's the cost of a good quality management team, and I've calculated the cost of what's, what is the cost of the infrastructure that you need to build a real business, that's the ERP system and all kinds of other infrastructure that's becoming more and more critical and more and more expensive. And then, and then I looked at, you know, general operating costs and other things like that, and then I worked backwards into the margins that would be average margins. And the number comes out to $7.5 million you've got to get your business to $7.5 million as fast as possible to be able to afford the management team that you need to run it and the infrastructure you need to scale it. And if you can't get to that quickly, try something else. So that's something that you made me really think about now. The other thing is something that I experienced in my coffee business, which you'd said, became too custom, unique solutions for, you know, everybody, the natural flow of business is complexity. It must move towards complexity. You just you can't stop it. You know, it's so hard to stop, only the most disciplined and experienced people in the world can stop the complexity of a business. And I see that in my coffee business, which I'm not, I'm not an employee of the company, but I'm an investor in the company. And we go through the finances in the business all the time talking about it. But, you know, sales people, customers leaders, are going to bite at every single opportunity that they see that's presented to them, and they want to say, can you do this? Can you do that? This guys do that. These guys do that. Can you do that? And what ends up happening is that you get a proliferation of products and services and offerings, and then that complexity drives up the cost and then drives down your profit. And what I really focus on now is trying to figure out, how do we scale one thing that we're doing really, really well, and that lesson about became too custom, too many unique solutions, really hits home with me. Any thoughts on those things?

Jon Ostenson 18:30
Yeah, no, 100% and I hope that those listening will take that to heart. Customization. It's easy to say, yes, you want to please, especially those early clients, those early customers of yours, right? You know you want to win business, so you'll do whatever it takes again, driving the top line, but not the profitable top line. And so, yeah, yeah. Lesson learned there. And brings me back to why I love the discipline of a franchise system and learning from others.

Andrew Stotz 18:55
So yeah, and that's the other reason. The reason why we end up doing all that, oftentimes in the beginning is because our original idea is not as good as we thought, and the market isn't there for it. So we end up in a phase prior to the 7.5 million that I call chasing revenue. We have to do it. You have to, you have to customize. You have to go get the revenue to pay the bills, but you've got to, there's a point where you got to break, break that pattern of customization, to chase revenue, to then become a scalable business. And that's, you know, a critical like turning point. So let's go back in time. Let's go back to your excitement about starting this business with your friend. And you know, all the great ideas you had at the beginning the entrepreneurial seizure, as Michael Gerber says, So, based on what you learned from this story, and what you continue to learn, what's one action that you'd recommend our listeners take to avoid suffering the same fate?

Jon Ostenson 19:54
Yeah, you know, I'll start by saying, there's never a perfect time to start a business, right? And I. Do think most people out there, they've never run a business, they have a desire to run a business. You know, grass is always greener. They look around, they see friends of theirs that are successful running businesses. There's never a perfect time. But as you think about it, I'd say, get in the game sooner than later, right? Get in the game. Learn some lessons before it's too late. Don't bet the farm you get in the game, start to improvise. My humble belief based on, I see so many cases out there, so many case studies. A lot of people are out there looking for an existing business to buy, and they feel like they're an entrepreneur because they're playing the game. They're talking to companies about selling. Most of these people look for three years, four years, five years. That's time they could have spent starting a business. And then they finally come to me, and they're like, oh, maybe I should be looking at franchising. I'm like, Yeah, whatever you do next won't be the only thing you ever do. So I encourage people think about what's right for the next chapter of your life and your business. What's that building block that you can put in place and build off of? I found in my experience, oftentimes, if they start with a franchise and they learn some best practices and how you stand up a business, go out and start a business later on, you know, go out and buy a business, but have a foundation that you can build off of.

Andrew Stotz 21:10
All right, so what's a resource that you'd recommend for our listeners?

Jon Ostenson 21:14
Yeah, I'd love to share a free copy of our book, non food franchising. I tried to pack a ton of content into 90 pages. We've gotten great feedback. It's a best selling book, but we'd love to provide a free downloadable version to all of your listeners. If you got your friend, come to our website. Fran, bridge consulting.com F, R, a n, bridge consulting.com share your email address. We'll send you links to download either the PDF or the audio version. Certainly if you'd like to buy the physical copy out on Amazon, all the proceeds go to hope, international, great nonprofit that we support so great would love

Andrew Stotz 21:45
to share that. Why do you have a tandem bike on the front of that?

Jon Ostenson 21:49
Because you're not alone. You're riding the bike with a partner.

Andrew Stotz 21:56
One reason why I asked about that is because I've recently been rejiggering one of my courses, which is called finance made ridiculously simple, and I've decided that I'm going to map it into a bicycle metaphor of a person ingests energy through food, and they lose so think of energy as revenue. You know, food as revenue, they're going to lose a portion of that in the process of digestion and in the process of respiration, and what they're left with is what you could call operating profit. And then the question is, how efficient, or you could call it gross profit either way, but let's say then the question is, how efficiently Are you able to operate that business? And if you're highly efficient, it means that you're going to have a higher net profit, which is going to be the force of your foot onto the pedal. You get a 2% net profit. You got a really weak force. You get a 10% net profit, you got a much stronger force, and that's usually driven by experience, like a bicycle, you know, expert a rider is, you know, really great at transferring that energy into force on the pedal and then the chain ring that you're pedaling on. If it was tiny, you wouldn't be able to pedal. You know, you could, you could pedal fast, but it wouldn't be really productive. But if the chain ring was bigger, then you would be able to pedal it at a bigger pace and make more of an impact. That's what I would call the asset turnover, the amount of revenue you're generating per assets. So the combination of all that gets you to the return on assets. And then what I then say is, Okay, now let's take it from Return on assets by linking the chain to the back wheel. And now we're talking about financial leverage, which is going to get you your return on equity. And that's ultimately the speed of the bike. Yeah, you know, you can be running, you know, running your chain ring really fast, but if you've, you know, if the more leverage you have, the faster you can take the bite. And if you take it too fast, what you can do is, you know, you hit a hill, and then all of a sudden you can't move up it.

Jon Ostenson 24:10
No, I love that. And the idea is you get the pedals move, and you don't have to pedal as hard, because you got the flywheel in effect. And obviously the analogy of trim the fat comes into play here too, right?

Andrew Stotz 24:20
Totally. And then, then what I then do is say, Now, imagine it's a tandem bike, and imagine that the person sitting on the back doesn't pedal. That's the shareholder. Yeah, the outside shareholder in any company is benefiting from the internal operational efficiency and the financial leverage of the company, and they're going to suffer the risk of it and the benefit of it, so it has to be balanced, but what we want to be able to do is provide a smooth ride and a fast ride for outside shareholders, so that they want to provide more capital, so that we can continue to grow so any. Ways. I just saw your tandem bike, and that made me love it. I haven't finalized it, and I've been struggling because originally I was going to tie it into a flywheel, but I realized nobody ever can visualize what is a flywheel. They can visualize it a bicycle.

Jon Ostenson 25:16
Shout out. Shout out to Jim Collins on

Andrew Stotz 25:19
that one. I mean, yeah, what a great book, in fact, on the bookshelf right back there. So last question, what is your number one goal for the next 12 months? Yeah, gosh,

Jon Ostenson 25:29
I love goal setting. I love this time of year as I think about this new year. Number one goal. I've always got revenue goals. I've always got personal goals. I think through things in five domains, you know, faith, family, fitness, finances and franchising, of course, to be the fifth F. But for me, a big thing, you know, this kind of powers everything else, right from creating capacity in other areas of my life to do things I want to do, is that passive income number so very focused, I invest in a wide variety of asset classes, franchising being one of them, but it's about creating passive revenue streams that allow me the capacity to do more of the things I want to do in these other domains.

Andrew Stotz 26:07
Pull the F Batman, a lot of F's, okay? And one question that I had when you just said that is, are there any investment vehicles like ETFs or funds that are now publicly available so people can invest in franchises, rather than, you know, having to, you know, build, you know, buy one.

Jon Ostenson 26:28
Yeah, no. I love the idea that there's short answer is, no. I've done some beta testing around trying to match up operators and investors. And, you know, I think there's a model to be had by having found an efficient way, in my experience, of making it happen.

Andrew Stotz 26:41
So okay, that's the future. 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. And as we conclude, John, 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?

Jon Ostenson 27:05
Like I said, there's never a good time to start a business. Get off the couch, dip your toe in the water, read our book, you know, get in the game, start thinking about it. More than happy to jump on a call. Entirely free to work with us.

Andrew Stotz 27:15
Fantastic. And I'll have links to you, to your book, your website, and everything, so that people can get in touch with you, and they're thinking, 2026 is the year to make it happen. Well, 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. You.

Andrew Stotz 00:02
Matt, 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, and I want to thank my listeners from New York City tonight, after having had a mayoral election recently. Fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Edwin. And like Edwin, are you ready to join the mission?

Edwin Endlich 00:38
I am ready to talk about good and bad decisions. Let's do this.

Andrew Stotz 00:43
Yes, that's the fun of this show. So let me introduce you to the audience. Edwin is the Chief Marketing Officer of wish and president of the National Alliance for financial literacy and inclusion. Edwin has spent his career at the intersection of marketing, FinTech and AI helping financial institutions tell more human stories in an increasingly digital world. He's passionate about making financial protection simple, accessible and even a little more fun, proving you don't need buzzwords or hype to make banking technology relevant. Evan, take a minute and tell us about the unique value you are bringing to this wonderful world.

Edwin Endlich 01:25
Ah, the unique value to this wonderful world. That's a great setup. Yeah, my, you know, journey was pretty non traditional in terms of where I ended up here. You know, I really wanted to be a TV writer. When I was a kid, I wanted to write comedy shows. I wanted to do all of that. And so when I came out of college, I worked at Dave Letterman for a while, and then and then at Comedy Central, and realized, wow, this is hard and very competitive, very stressful. And so ended up I got pulled in to write some small videos for this new website called YouTube that had just launched in the early 2000s and that kind of turned me on to marketing, and that's where I've been ever since. And have been a you know executive in that field for now 20 years, and it's been amazing, but I've been fortunate that I've gotten to spend the last almost 10 years helping people understand their finances better, being able to sort of understand risk, reward, their legacy and what They plan on leaving behind has been a big focus for me. So I feel like that's the value I'm bringing to the universe today is a sense of help and support for those who need it around their finances. Interesting.

Andrew Stotz 02:55
And do you still write a lot? Or are you writing a lot less, you know, if I heard you write, I was thinking to myself, gosh, writing is so hard. Sometimes when I was young, I didn't really like it. I preferred reading. I ended up writing a lot, but not necessarily by choice. But do you enjoy writing? Are you writing much these days, or

Edwin Endlich 03:17
I still write a lot? You know, I started as a copywriter in marketing, and I've always continued to write that, to the chagrin of our creative teams that I manage. I will still need to write things because I just feel like it has to sound a very specific way in my head. And so, yeah, so I do write, I probably should delegate more, but I don't.

Andrew Stotz 03:43
And what, let me ask you about the work that you're doing and like, what's the biggest challenge or the biggest problem that you see that you're trying to solve?

Edwin Endlich 03:53
Yeah, so you know, when I was part of the foundation of the group that started wish, which is a financial protection company, and that really, at the end of the day, it's a life insurance company. And, you know, a big challenge for many people is kind of, like, why I'm excited to be here today is, like, they just think it's an awful investment, and it's just, you know, not worth our time. It's something old people get. It's something that you only take out a life insurance policy if you're going to kill your spouse. That's what I've learned on Netflix. Is that so a big challenge for us and for and for me personally as a storyteller, was, how do you educate people about a financial like a legacy that they want to leave to their family, that they want to protect those who need them. And how do you make that story interesting? How do you make it new? And how do you make it not feel stodgy and boring, that is a pretty big challenge for us that I've been excited about. And how. Hyper focused on

Andrew Stotz 05:01
interesting when I was born in 1965 and in that year when I was born, my dad bought a life insurance policy for me, and the premium was, well, the premium, the premiums have ended now, and I don't have to pay them anymore. This, it's been accumulated, and it's limited as much as a payout is. But the point was, you know, for many years, he transferred that to me when I was 18, and I paid $125 a year for that premium. Now, now at the age of 60, I realized like it would be enough, probably, to fly my body home, come out of it. Luckily for me, I don't have a family that I'm worried about leaving something to. So that's a little different. But that was just kind of interesting that my dad, I didn't know about it, and of course, until I got out of, like, high school, or maybe it was a university, when my dad said, Okay, now you can start paying this.

Edwin Endlich 05:59
Like, thanks, Dad. Exactly,

Andrew Stotz 06:01
exactly. Well, 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 circumstance and leading up to it, and then tell us your story.

Edwin Endlich 06:12
You know, I bet it's very familiar to a lot of people who were around in that 2015 2016 time period when the world of cannabis investment became possible. Before that, there was nothing you could ever do to invest in, you know, anything other than you know, alcohol and tobacco, maybe firearms, I guess you could. But all of a sudden, in around that kind of 2016 there started to be the possibility for investments in the cannabis space. And you know, me and my friends who were just blown away that we were living in the time when this was going to be possible, we just didn't want to miss out. And we felt very much like we were going to be the ones who invested in companies when they were still being discovered. It was a new frontier. And, you know, some things came out in IPO, and we were like, You know what, Tilray, it's $143 a share. You know what? I bet that's gonna split 567, times in the next couple years. Let me go all in now. And so I think, yeah, I think I bought it 143 and I think I sold it last year at around 30 cents. So I would say that 99.3% loss may have been my worst investment, but there was such a excitement and passion around just being part of something new, being part of a movement, that you just didn't want to say you were too scared to invest, or you were too conservative, or you thought it was a blip. All of us just wouldn't let that train leave the station without being on it.

Andrew Stotz 08:06
Yeah, that's it's not uncommon, you know, people, we get excited about these new things. There were, there were actually drug cannabis businesses. It was called drug dealers. I was one of them when I was in high school, you know, but it wasn't a legal way of investing in cannabis. But I had one of my guests who also lived in Thailand a long time ago, named Lance Depew, and he's a really, really experienced analyst, and he talked about how he bought a shipping stock, and it just went down and down and down, and at each stage he talked about why he didn't sell. And then it was like, I don't know it was 20 or 30 years. And then he was like, and then I finally sold. And I thought, like, even, like, a really experienced guy, sometimes you just, you know, you're just gonna lose. You know, it just is going to happen. But maybe you could explain a little bit about, like, what your feelings were like, as you saw, it started to go down, and then, you know, eventually it's like, okay, obviously you get to a point where, you know, you've completely given up. But I'm just curious, like, what were your feelings like, why, why not sell at this point? Or did you have any of those thoughts as you went as it went down?

Edwin Endlich 09:14
Yeah, I think it was really challenging, because there was always a voice in your head that was telling me, this is uncharted territory. This is new. No one's ever experienced this, which I think, as an investor, you always think you're the only person who's ever experienced this type of investment. You're the only you know. You really think you are unique. So you tell yourself, like all of those you know, fundamental things that you're taught as an investor don't apply to this situation I'm in. I am in a unique environment. There's never been a market like this. There's never been a product like this. It's not allowed at like a federal but it is at the state level. So that's why, as soon as that opens up, that's going to shift. So you always felt it's like we were just one bill, one election cycle away from everything turning around. But again, everyone says that about every investment they have, when it starts to go down, you always think we're just one portfolio analysis away from turning this around, where one good meeting with shareholders can turn this around. So that, to me, was very tough. Was always thinking, I'm unique. What I'm going through is the only time this has ever happened, and what I think is going to happen is, is, is absolutely possible.

Andrew Stotz 10:44
Yeah, yeah. And, you know, you it is true, you know, it's kind of a new industry. It's going through a lot of, you know, growing pains, and people aren't figuring out, like, how does this work? Even in Thailand, Thailand was actually quite liberal when they kind of legalized cannabis. And so we have shops everywhere. And, I mean, you can't help but think there's a boom going on. But what they didn't realize was, okay, the legislators were going to change, and, you know, things were going to change, and then all of a sudden. But can you remember a day when you were like, Okay, I give up. I've this is pretty much lost money. Is there any particular day that you thought, okay, there's no more hope now on this

Edwin Endlich 11:25
I think, I think there was when my daughter started high school this year, and it was at the beginning of the year, and I had a real aggressive goal of how much I wanted To be set up for her college fund when she started high school, you know, I thought, and I really did imagine, the cannabis investments were going to be a big part of that equation. So when she started high school, that was when I said I would look at my portfolio and had this dream of, I laughed to myself, I cannot believe I invested only this much, and look at the returns. And so when she started high school on September 9, I remember looking at the portfolio and saying, You gotta let go. It did not help in any way she could barely get, like, you know, a fast food lunch, yeah, that I've got for college, let alone tuition.

Andrew Stotz 12:32
Yeah, so let's, let's talk about, maybe you can summarize the lessons that you learned from this? Yeah, I

Edwin Endlich 12:39
think you know, I learned that the you know, even the things like you were saying when you're just talking about the experience of it's a new product. No one knows that this is going to work out or not, like legislation could change everything I learned that applies to every investment, that there is nothing unique about that, that things are always going to need to find a footing, that there could be transitions. It could change any second. So I really learned that the market fundamentals applied really everything, and that's why they're called the fundamentals, and that I really needed to kind of check my ego at the door, check my belief that we are in unprecedented times, which I think people love to say all the time. So whether it's going through covid, going through this or that, you always want to say this has never happened before, when it has happened before. And there are people you could talk to. There is real advice to be given and to not ignore that. And yeah, I learned. I learned a lot.

Andrew Stotz 13:50
Yeah, that's and I would say my takeaway too, is when you construct a portfolio of stocks, you not only want to think about, you know, combining different stocks, but you also want to think about different stocks in different stages of their life. So let's take another drug, like Coca Cola or Pepsi or whatever. You know now that's all the regulations about that, and the way that that works in the industries and stuff like that is pretty stable. Not to say that it couldn't get messed up, but it's pretty stable, whereas the cannabis thing is at an early stage. So it made me think like diversifying across stages of development or life cycle of a company, also makes sense. That was another thing I would take away from that. So let's, let's now go back in time, and let's think about when you and your friends and others were thinking, and, you know, everybody was thinking, you know, this is exciting. This is cutting edge. We've got to get in based on what you learned from this story and what you continue to learn, what's one action you'd recommend our listeners take to avoid suffering the same fate? Let's think of. Young man or woman today that's enthralled just as you were, what's one thing that they can do

Speaker 1 15:08
to help them not lose it all?

Edwin Endlich 15:11
Yeah, I think you know, a parallel for me that I'm seeing now is with artificial intelligence in terms of just the unprecedented amount of belief that we've never had technology like this come out of nowhere, when, in fact, we absolutely have, and we have made mistakes in the past of where our investments were. We've had a bubble in this same sort of way before. So I definitely feel like you know the things I've learned from the cannabis experience, I really am trying to tell to evangelize for people to use today around this artificial intelligence conversation as well, and see some of the pitfalls that we had in the early internet days of the 2000s where I think we could learn a lot from that. You know, we saw so many companies in the early 2000s feeling like they needed to create all their technology from scratch, in house. It needed to be theirs. They needed to own it. And they really lagged behind a lot of other companies who just formed partnerships with technology. And so I kind of look to things like that to say, hey, as we're in this now, boom of this AI conversation, let's not forget the fundamentals of the market. You know, experience that has happened in this space before learn from it. And don't get too cocky.

Andrew Stotz 16:47
Yep, great advice. It reminded me when I was doing my PhD at a Chinese University, and I had a cultural class that I had to learn, you know, history and culture of China, and I wrote a paper and an article about comparing the Chinese railway system to the US railway system. Basically, I found kind of the dates that I wanted to count as ground zero. In America, it was, let's say 18. You know, 1820 or whatever, that year was, 1850 and in China, maybe it was 1900 or whatever. And then I counted that as year zero. And then I looked at the number of the kilometers or miles of train track that each one did. And what I saw was, in the US is just, it was just crazy, the bubble that was happening in train track, because, you know, it was a speculative bubble. There was a huge amount of capital put behind it, whereas China's was kind of just always steady up, but America's went up massively and then eventually clashed down. And now China has now exceeded the length of the railroads in the US. But what was interesting about that is that was a bubble. We saw bubbles in cars when they first came out without, you know, hundreds of 1000s of car companies that then got consolidated down to a small number. And then air travel was another, you know, major invention that basically has brought us all around the world and has changed the world massively and that was a bubble that's now come down to earth. So why wouldn't AI or any other thing be a bubble? So that's a great reminder for all of us that people get excited. So what's let me ask you, what's a resource that you recommend for our listener of yours, or any others

Edwin Endlich 18:39
you know? For those you know, I'll do my shameless plug for my not for profit, which is Natalie, the National Alliance for financial literacy and inclusion. You know, I really, you know, struggled in my life to understand financial terms, understand a lease, understand investing. And so I, you know, helped start a not for profit, that is really all about allowing people to kind of get more education on their financial lives, and to work with financial institutions to ensure that they are educating their customers. And so if you need any help, or if you are at a financial institution, you should check out, n, a, f l, i.org naturally.org. For all the great work that we are doing,

Andrew Stotz 19:26
excellent. And I'll put that in the show notes. So for those interested, make sure you click on and I got it right here. N, A L, f l, i.org national alliance for financial literacy and inclusion, empowering communities through financial, education and innovation, which is exciting. All right, so what last question? What's your number one goal for the next 12 months?

Edwin Endlich 19:51
Oh, my number one goal for the next 12 months. You know, I really want, uh. Uh, to have a full conversation with my daughter that does not stop after 10 minutes, right? That's a big goal for me. I'm really trying to connect there. We try to be a human, really trying to put my phone down and, you know, make those human connections. I think, you know, this election cycle in New York that we've just had, I think it's more important than ever for us to kind of get those human connections back in our lives, and to feel part of like a community again, is kind of where I'm focused this year, is to feel that connection again.

Andrew Stotz 20:41
Oh, that's great. I just posted on my Instagram a hug that I was giving my mom. I was standing behind her, she's 87 now, and I was standing behind her, and I was holding on her, you know, and she was kind of holding on to my arms. And the caption I put in, which is what I always tell her, is,

21:01
you know why I'm hugging you?

Andrew Stotz 21:04
Because I can, yep, and I won't always be able to, because she will be gone. And so in spirit of what you've just said, Let's hug the people while we got them with us, and let's hold them and let's cherish those relationships. So I admire you know what you've just discussed, and I can't wait to hear more about it 12 months from now. Well, here, yeah, listeners, there you have. It. Another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. And as we conclude Edwin, 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?

Edwin Endlich 21:54
Oh, you know, stay focused and look to the past. Fantastic.

Andrew Stotz 22:01
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. You.

Andrew Stotz 00:01
Matt, 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, and I want to thank my listeners in Oregon right now for listening to this podcast and sharing also and fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guests. Scott Aldridge, Scott, are you ready to join the mission?

Scott Alldridge 00:39
I'm excited. Thanks for having me. Yeah,

Andrew Stotz 00:42
of all people, of all people, I can't wait for your story. Why is that? Well, let me introduce you to the audience. Hold on, ladies and gentlemen. Scott is CEO of IP services and president of the IT Process Institute. He's the best selling author of the visual, visible ops series, and a certified chief information security officer. He holds an MBA in cyber security and has 30 plus years in IT Cyber Security Leadership. Scott empowers organizations to achieve resilience through Process Excellence, zero trust and AI driven securities. Scott, take a minute and tell us about the unique value you are bringing to this wonderful world.

Scott Alldridge 01:24
Yeah, well, first, thanks for having me, Andrew. I love your podcast. I've listened to several episodes now, and I'm just thrilled to be here. So go listen five star. Mark it up for all your listeners out there. It's really great. I think the unique value I bring to the world is I kind of was born an entrepreneur. I started, literally when I was nine years old, as being an entrepreneur with a raspberry patch, believe it or not, and have reinvented that different businesses throughout the years. And of course, the last 30 years, I've been doing cyber security and IT management and really focusing on doing best practices. And so the unique value, I would say, is that I really am a little bit like you're on a mission to help a million people. We're on a mission actually, to help a million businesses. And IT managers, directors and cybersecurity professionals keep the world a safer place because we read the news every day, and, boy, everybody that reads the News knows we need better cybersecurity practices.

Andrew Stotz 02:18
Yeah, it's interesting when I think about the risks that are lurking beneath the surface are much I mean, when you look at the risks that are out there, it must just terrify you as you see what companies are doing and what individuals are doing. I'm just curious, like in your line of work, what are some of the, let's say, top one or two risks that you see that companies things that companies are exposed to?

Scott Alldridge 02:46
Yeah, great question. I'll actually start with a little story I sometimes tell later on. But interesting enough, there's this thing called the dark web, and that's where a lot of the threat actors and the evil doers live in the world of cyber and they're connected the internet, so they can be anywhere in the world, and they can hack and attack anywhere, wherever you are. So no business is safe if you're connected to the internet. That's just the truth. But the reality is, there's a thing called the Tor Browser. Nobody should be using it. It actually allows you to access couple browsers, but it's one of the more popular ones on the dark web. And here, about three months ago, we were doing some lab stuff on some Tor Browser, just some cyber shop workshop stuff. But stumbled onto an ad that popped up, believe it or not, on a site that said, Get your ransomware franchise kit today. And it said, for $295 you can join our ransomware franchise listed a bunch of benefits that we give you a kit to go out and scan networks, find vulnerabilities, find ports that are open. If you get stuck, you can escalate to our expert team at a one 800 or an online, real time chat. We'll walk you through how to hack in, and then when we get the proceeds, we will split the profits, 5050, we also can use our one 800 call center to settle up for the crypto because most businesses don't deal in crypto. I'm thinking to myself, if you're a sharp, smart middle school kid, high school kid, and you want to be a little nefarious and you're a little upset at the world, you just go buy a franchise on the dark web, and you're a ransomware attacker. To me, that's one of the most scary things I've seen even just recently

Andrew Stotz 04:23
that is terrifying. And I think that, you know, the problem is, most of us just don't realize that, that that's out there. We like to think that the world is good. And I have a friend of mine that he does a lot of he's a very honest and sincere guy, but he has to go on the dark webs to do some stuff to help his clients and all that. And he started telling me what's on there. And it just terrifies me when I hear about it.

Scott Alldridge 04:51
It is sickening, honestly, because it's all the way from, you know, any kind of narcotic or nefarious activity or drug to human trafficking, to all kinds. Kinds of just incredibly awful things. It really, truly is a dark place. And, yeah, that's exactly right. One other little side note too, to think about cyber just in general, is that, you know, I'm thinking about the Caesars MGM Grand hack that happened about a year and a half ago. It was actually, you know, they've got all the best cyber tools, the best cyber people in the world, you know, they're a casino, they're worth millions and billions, and yet, one phone call to their Help Support Center to get them to change an administrative password through somebody who fished them, and they changed that, they elevated, they broke and they hacked inside, they elevated the password and was able to bring it to its knees for about 26 days. Cost them right at $198 million is what it cost them. And then just a couple months ago, actually, they just settled for $49 million with a class action suit for all the data that they stole, the confidential information that was there. So just to summarize, right, even the biggest, most sophisticated willing to invest in cyber because they had a lot to protect if they're getting hacked. How much easier is it for your typical small business that no longer is not a particular target, based on what I shared just a little bit ago, everybody's a target. One phone call, 140 $9 million that's pretty crazy. Think about,

Andrew Stotz 06:16
and just just to understand your business for a moment, like if I think about, let's say I have one of my businesses is a coffee factory, and we've had it for 30 years. We have a list of clients, and we have a lot of client detail. We have employee data detail, we've got our recipes, you know, we got all of that stuff and I just can imagine, you know, if an expert like you was to, if we were to hire an expert like you, it just would be crazy what we would find. But what is the service that you offer? How do you what? What is it that you generally are doing with companies?

Scott Alldridge 06:49
Sure. Yeah, so I've been, you know, privileged to be an advisor to some of the, you know, larger companies across the, really the world, but more in the US. But my business is IP services. We are what we call a managed services security provider. So we're the team that you subscribe to that we come in with our bench of experts, and you don't have to have all of them hired full on. You actually get a whole team for a portion of the cost. But then we also are up on the latest and greatest techniques, methods and so forth to keep your business safe. So we roll out. And one of the things in my book, which we'll talk about later, probably talk about a zero trust methodology. It's been around for a while. We've been promoting it for years, but the idea is exactly what it says. It's like, you trust nothing and verify everything. And that's been said before. And so this idea of using that what they break it down into seven pillars, if you will, of the way that you do cybersecurity. So I speak to it as layers. So we come in, and we start off using with an assessment of what we call a penetration test, and we look at all the weaknesses in a particular network, whether it's small, medium or large. And then when we find those vulnerabilities, we prioritize based on what the risk is, how we're going to stop, you know, and plug those holes and put the right layers of cyber security in and it takes a lot of layers. Honestly, you almost can't have enough layers. That's kind of where it's at in the world today. But that's my business. We deliver those services.

Andrew Stotz 08:09
And if you think about, are you focused on small, medium or large size businesses?

Scott Alldridge 08:14
So we may do what I would call, generally speaking, SMB. So usually, you know, could be up. We have a handful, under 100 just under 100 but using 100 to 100 to about 2500 employees is a really good fit

Andrew Stotz 08:25
sweet spot for us. And just out of curiosity, I mean, I'm talking about totally selfishly about my business and thinking about it, you know, when you come in, let's say that you come in, and I don't know how long an engagement would last. Maybe you can tell us that. But the other thing is, like, you know, I'm assuming that it would be pretty quickly. You'd be like, we need to close this door. We need to close this door. Like, you're going to basically find three to five major vulnerabilities that we didn't even know, and you're going to help us, you know, fix those immediately. Or, how does it work?

Scott Alldridge 08:59
Yeah, so it's exactly right. A penetration tests are typically different methods and levels, but we actually use a patented process, and we actually use a third party that we're partnered with. And the reason is, is because we bring in a cyber security program, right? Some of those layers, we can't be the ones that are managing your cyber security and then tell you we're doing a really good job. We need to have a trusted, validated third party that can attest to the fact that you we really have plugged the holes in your security postures tight. But when that relationship we have the ability to do some different types of penetration testing and through we, at the end of the podcast today, I actually have a little offer. I extend your audience around that, but, but the point is, is that what we do find stuff we've never ran a report hundreds, maybe even 1000s, of companies we've not ran into a report where we don't get some findings, and most of them, quite frankly, are a lot of things they don't think about. And of late, the more recent one is we've added, they've added an element of scanning for the deployment of AI, your, you know, chat, gpts that's on your network. And it actually give us a summary of the vulnerability, kind of a score as to how risky that particular AI that you're using is on your network, because that's just one thing that a company may not think about, and that's one thing that the penetration test actually checks off for.

Andrew Stotz 10:13
Now I think that any business owner that hears what you just said says, I need that. But the question is, Is it difficult? Does it require a lot of work from me when I hire you? And is it expensive?

Scott Alldridge 10:26
Yeah, so the cool part is, is that it's not difficult, and we actually can do it incognito, so you don't necessarily have to disrupt your IT teams. Rather, you want to check on them, because you got, you know, Bob, Mike and Sarah, telling you we are good cyber wise. Sometimes that's an interesting thing to be able to do as a, you know, an owner or a president or an executive, to say, I want to check on my team. It's trust, but verify, right? It's not just not trying to be dishonorable to your team, but and not trusting them, but you got to verify, and that's the way you can verify. So it's very easy to do. It's pretty simple. Pen test can run from $2,500 up to about 10,000 for the size of companies that I just said, the new practice, and the best practice over the last year and a half, two years now, is they used to do different types of tests, like once a year, then a couple times a year, once a quarter, vulnerability scanning. The new thing is that every month, you should be running a variety of different vulnerability and penetration tests on your network. And the reason is, is because environments in our world, IT environments, network systems, operating systems, applications. They're forever changing. And every time something changes, a new vulnerability may be exposed. So every month, doing, you know, the regiment of so that's one of the services we offer, is we actually will come in, deploy the penetration testing services and some other things around it, and then we'll be able to do remediation and then put layers and work on you over time, because everybody can't budget to afford everything right away. But penetration tester are a little bit expensive actually to run, but they're a very fast way to see where those big holes might be in your security. Yeah.

Andrew Stotz 11:57
Well, I'm glad to have you on the show, because I know for myself and for the listeners you know it this, get this can really hit home. And so I'm interested in learning more, but 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 it, then tell us your story. Sure.

Scott Alldridge 12:18
So live out here in the Northwest. I'm actually out in Oregon, in the United States, and here in the Northwest, we're kind of the coffee capital of the world. We were doing coffee, obviously, not before other countries were doing coffee, years before the United States, but it became somewhat of a popular thing. The home of Starbucks is in Seattle, and so coffee is a big, big deal. And I had a lot of interest in coffee, and I know you just noted you're in the coffee business, so we had somebody, kind of, you know, pitch us here about five years ago on the coffee drone disaster, is what I'm going to call it. And it's, you know, kind of this dream idea that be able to deliver coffee with a coffee drop, be the world's first drone, you know, drone, because Amazon's doing a lot of drone stuff. They were testing it about four or five years ago, became this big thing. Then it basically became straight out of a TED talk, right? Like you could just think it click a button on your phone, and then the drone shows up with your hot cup of whatever you like, right? So I'm thinking, this is fantastic, right? I love coffee. Interested in the business always have been, been a coffee drinker, and, you know, pretty enthused, if you will. And a matter of fact, I was doing coffee stuff and work with a had a little coffee stand before Starbucks was even in our town. Now, there's like 10 Starbucks in our town. It's that kind of thing. But anyway, so they pitched it. I listened to the deck, talked to a couple people, sent on a couple calls, threw in tank, a 3% stake. I'm thinking that's a lot for Tim, but they're pitching It's not much. I'm thinking this is going to be a, you know, caffeinated, charged empire, all excited. Three months later, the FAA, of course, did the cease and desist on all the drone delivery stuff. They're now re imbibing it some, because you're seeing drone delivery. And of course, who knew, right? I mean, the idea that you're flying liquids around stuff that could be, you know, hot coffee on people's heads, honestly. So the final straw, you know, of course, the prototype literally spilled this Americana, you know, the pilot drone was grounded. It spilled it all over the place. It was actually on a video. And so that's my worst investment. I don't know what I was thinking delivering coffee through drones was going to make me hundreds of 1000s of dollars. I was getting a huge stake in the company. Well, of course I was, because it was never going to fly. No pun intended.

Andrew Stotz 14:34
So how would you summarize the lessons that you learned from that?

Scott Alldridge 14:38
I think the practicality is like, you know, first off, when you're investing in something, it's a little bit of a catch 22 because if you want to, you know, be early, an early adopter, right? And you've got something inventive that creates value, and it's, it's, of course, intellectual property, and you're the firstest with the mostest and the bestest, it becomes that kind of thing. So there's big opportunity. But I. Also think your risk is huge, you know, much, much higher. So maybe for me, thinking a little farther down, so things are a little more tested, a little more beta, a little more proven, not jumping in just based on a great PowerPoint and a great pitch deck, really see that the product has been proven, that it really can work if it's a product based, you know thing, if it's something else, it might be a different thing. But that's my biggest lesson. Is, don't you know, Wait, calm down. You know you don't need to jump in. Being the first with the most is, if it's a bad idea, you're going to lose money anyway. So it's crazy. That's my lesson. Okay, by

Andrew Stotz 15:31
the way, do you know who is the originator saying the first is with the most is? I do not. So it was Nathan Bedford Forrest, who was a Calvary man in the southern side of the Civil War, and he was one of the winningest, you know, Calvary leaders. And they asked him, How did you, you know, do it? He said, I get there first is with the mostest. I like it. And that was good. And it's interesting, you know, one of the things that made me think about in Thailand, sorry, in China, they're doing coffee delivery all the time by drone, and they've set it up where they're delivering to, like a unit. And people go to like a park, and they go, I want KFC. There's a whole thing. You press button, I want KFC. I want a coffee Starbucks. I want to this. And that five minutes later, a drone arrives, comes into this unit, deposits whatever it has, and then a box opens, you take it and now, and it's got, like, storage areas and stuff. It's incredible. What they

Scott Alldridge 16:28
write about that. I read a little blip on that also. I didn't believe it. I didn't know, I didn't know it really existed. I thought, well, that must be something, yeah, okay, definitely it's getting more. They're doing delivery now in some markets. You know, Amazon's doing delivery in certain areas, but Yeah, way before it's time, not proven, not a good method, yeah, yeah, it was a bad,

Andrew Stotz 16:45
bad. And if I look at that also, I just one of the things that I just think about is business is so hard. Business is hard, you never know where as I tell people when they start business. I said the most important thing in starting your business is, don't make the wrong mistake. And they say, well, what's the wrong mistake? I say, I have no idea what it is. You know, you don't either, but just don't make it. But you can't do a business without taking risk. But you know, the product market fit and trying, you know, and it's not the only you're not the only one that come on with something like this. The cannabis space is also filled with so many people that went into it with all the excitement. They were high with excitement, how we say? And then all of a sudden, the regulation changes, and that, that's something that, you know, is something that we've got to always think about, but you just never know where it would come from. So let's now go and imagine a young man or woman right now today, and they've had an idea presented to them similar to what you faced. They're pretty excited about it. So based on what you learned from this and what you continue to learn in your life, I mean, look at all the risks and other things that you've seen through your career, what would be one action that you'd recommend that they take in order to avoid suffering the same fate?

Scott Alldridge 18:10
Yeah, I think you honestly probably the biggest is due diligence, and people tend to shortcut it, because we get excited, the passion takes over. We've wanted to be in a business. We want to do a business. We've got a night. We've got an idea, and so we let the passion rule, and we really don't do the due diligence, and I mean on all fronts. And I actually mean that even if you're acquisitioning a business, a lot of smaller companies, they, you know, even you know, they just don't know how to do great proper due diligence. And then they don't find out where the issues are beforehand, and the investment doesn't turn out. But if you're starting, I think the same rule applies. You have to really do your homework, and it's not easy, and you've got to be prepared for that doesn't work, or, no, or this is a bad idea, stop, drop and roll and look for the next investment, and then continue the due diligence. And again, nothing's going to be a sure thing. You're never going to eliminate risk, right? The if there's even the most proven businesses are risk, even franchises fail a lot. So anyway, I think that's the biggest thing, is due diligence for me. Really take your time, be patient, be smart and be willing to walk away.

Andrew Stotz 19:15
Man, that's great advice. I also, I did a research study many years ago when I was an analyst, you know, full time, and that was, I looked at 5000 m&a deals and across the world over 20 years, and I asked the question, I wasn't so concerned about the share price, because I knew that you don't want to own the company that's buying. You want to own the company that's being acquired and and I also know that you can't make money if you buy after it's announced, and it's illegal to trade before it's announced. If you're an insider. Now, if you can figure out the conditions of what make a company attractive for takeover, then you could build a portfolio of companies to say. Right? The probability of takeover here is high, sure, but, but what I was more concerned about is, what was the return that the company that bought other companies got in the future? Because obviously we're always going to hear that this is a good idea to make this acquisition, to make this investment. And what I found was that about 78% of the time, within three to five years, the profitability of the acquiring company have fallen, meaning, basically only 20% of the time did an M and a transaction with a big companies listed in the stock market. Smartest people with all the resources, only 20% of the time did it actually add value to the acquiring company. And once you understand those statistics, it helps you to think, yeah, due diligence is important. And thinking about so much, about the integration, about all that. Now that's M and A you were talking about investing in startup, but the due diligence is still the same.

Scott Alldridge 21:03
Yeah, it's huge. So thank you.

Andrew Stotz 21:05
Let's talk about a resource. What's a resource that you'd recommend for our listeners? I know you've also got a new book coming out, right?

Scott Alldridge 21:12
Yeah, I do. So one of the resources that I'm excited is this year, I released a book called The visible ops cyber security. It's really about enhancing your cybersecurity posture with practical guidance. It comes from a series of books called the visible ops handbooks released in the later 2000s in over 15 years, we've sold about 350,000 copies of this series of books. I authored the last book by myself. Co authored some of the others. But that book is pretty exciting. It's an Amazon bestseller already this year, and it's doing very well. And it really is an altruistic book. In one sense. I kind of give away our secret sauce. If you want to know how we run our company and how we design, you know, our services and what's built on zero trust and having the right philosophy. And it starts with leadership. And so I kind of go through all those things in the chapters. In the last chapter is the golden thread, where I weave a golden needle of thread through all of the various chapters to show how that really builds a really airtight cybersecurity program and posture. Excited. I'm also working on a new book called The visible ops AI, artificial intelligence governance with practical guidance. I think best practices is the subtitle. And so to working on that not finished yet, but it's getting close. I'm excited about that. And that kind of comes from just recent stuff. That's not really a big, formalized study, but I read a study between business being 500,000 employees. They have about 23 different types of AI that is being ran in their business, and they likely don't hardly know it. They know some of it. And we don't think about the, you know, how we govern and control and have policy around that to protect the business. And people are loading up all kinds of amazing things, like, you know, client list and financials and recipes, and they're thinking, woohoo, this is amazing how it's organizing my stuff and making us so more efficient. But they don't realize, is that data secure? What AI is it going into who could be looking at that stuff? So that's, that's a the book I'm kind of excited about that'll be coming out here this, you know, at very at the end of the year, right at the beginning of next year. But, but visible ops book is a resource that I would really encourage everybody to to take a look at. And I have another iteration of that that I wrote a few months ago that's called the visible ops executive companion guide, built off the book. And this one is a more of a, not a 400 page cyber security book. That's a little heavy duty for some. And it's 105 page executive guide, no geek speak. So you kind of talks about practical things, like we look at a delight and two study in there where it says, Hey, if you're of this kind of business, you should be spending this amount of your budget on it. And, oh, by the way, out of that budget, you should be spending this amount on your cybersecurity program. And it looks at things like, you're a candy company. Make world class candy, do it well, you're not a cyber ops organization. You're not trying to be a cyber security company. Why try to be so that's the stuff, the practical stuff that it gets into as well.

Andrew Stotz 23:56
I'm wondering if what this ends up leading to is that people move away from chat GPT type of independent and they move into something that I have on my computer, but I don't use that much, which is called copilot as an example, because it's built into the Microsoft infrastructure, and they can implement security with that. Is that where we're going with this?

Scott Alldridge 24:18
Well, I'm not so convinced, because, you know, usually the fine print like Google, right? We all know how that works, and we all know about the Amazon world, right? We start talking about the barbecue in the backyard. We're going to get new this summer. And what starts showing up on your ads, right? Their fine print actually gives them, usually, rights to most of your data, to access the data. It's supposed to be anomalous. There's some fine print in there. There's some rules, some guidance, some governance around laws that what they can and can't do, but they're very good at taking this piece of data and that piece of data and then filling in the blank between what it is. So I'm not convinced that any of the AI, unless you're paying for a subscription at a business level service. And you've looked at their policies, and they're telling you, they're in writing, that they do follow security protocols, and your confidential data is kept confidential. Now, in theory, the latest iteration of chat GBT with a business account, I think it's 20 or 30 bucks a month. It's supposed to meet that bar, but I do think we need to move cautiously, because historically, we've seen things that were supposed to be everybody was convinced they were, but we're not totally sure that they are in terms of security or following the policies, or they're doing the service the way that they say they're doing the service and keeping it private. So I'm not to be a skeptic or whatever, but I just think there's a lot of caution around AI that needs to be applied, and you need to be careful, but there's a lot of things you can put in there, and a lot of efficiencies you can gain about stuff. And it can be used, and I think it should be used, and businesses should it's a competitive advantage, right? And they need to use it in the way that they can use it, or build their own LLM or their own language model that's unique to their business, that they can keep privatized. They can put the right visible ops cyber security controls around it, and that will make keep them safe and keep their data safe.

Andrew Stotz 26:04
Great. Now, let me ask you, what is your number one goal for the next 12 months?

Scott Alldridge 26:11
Well, number one is, I'm, you know, continue to work on kind of growing the top line revenue at my IP services company. So we're looking for new logos and working on that pretty hard. But the other, you know, side of that is we really have a little bit of altruistic goal with, you know, the IT Process Institute. We kind of do research, benchmarking and prescriptive guidance, a little lighter on the research and pre and, excuse me, on the research and the benchmarking. We more work with a couple of other organizations now, because they can do it more efficiently and faster and less money, quite frankly. But then we take all that data, and we look through it, analyze it, sometimes put some regression analysis on do different things with it, and then we're able to kind of come back with some science to this manage by fact, not by belief, which is really what the series of books of visible Ops is all about. It's looking at what's proven, both quantitatively and qualitatively with science type methodology, science and research methodologies, and then saying, apply these practices, and you know, you're going to get the results right. And so that's the prescriptive side. So that's where I camp in. And that's an altruistic goal. It's trying to get better. It performance, higher user satisfaction, safer. Companies. Making the World Cyber Safe is a big, big part for us. It's really huge.

Andrew Stotz 27:19
Yeah, you mentioned that you had an offer. And just for the audience, we'll have links to your books that you've mentioned and on in the show notes, but maybe you can talk briefly about that.

Scott Alldridge 27:29
Yeah, absolutely. Um, you know, come on a podcast like this, and to your audience that's so unique. I've got a couple things I'd love to do. Number one, I'll give you a business text line here in just a second that you can text secure 25 to but here's what I'll do. I'm going to send you a PDF copy of the executive companion book. It sells for 1795 on Amazon. I'm going to just send that credit as my team will they'll get it out to you. And if you do the secure 25 to the text I'm giving you, and then second, and this one, I've got three of so I got three in the bag that I can do for for the your companies, your audience, and that is, I can do a penetration test, do this scan to look for the AI, the stuff I talked about in this podcast, and give you a great report that you can go back and use your team or your current provider. Of course, if there's gaps, we'd love to talk to you about that as well, but we're going to do that lot of value in that. Those are 2500 to 10 grand. You could Google pen test for my company, and you're going to see a pop up, you'll be surprised. And it's an awesome pen test. It's a patented process that we do, and I'm going to give away three of those. So here it is, secure 25 put those you know that will text in to 54135912691, more time, 541-359-1269, and we're here in the USA. That's USA number

Andrew Stotz 28:40
wonderful, amazing. That's an exceptional opportunity. 541-359-1269, that is it okay? And Sid, text, secure, 25 That's right, yep, that's exciting. 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, and now realize there's a lot of opportunity with reducing cyber, cyber security risk in your lives. And as we conclude, Scott, I want to thank you again for joining our mission. And on behalf of a Scots 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

Scott Alldridge 29:24
audience? I don't. Thank you for having me today, and I just let's keep the world a cyber safe place, amen.

Andrew Stotz 29:28
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. You.

Andrew Stotz 00:01
Matt, Hello, fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, and I want to thank you for joining that mission today, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Dr Thomas Powell. Thomas, are you ready to join the mission?

Dr. Thomas Powell 00:36
Absolutely, Andrew, this is gonna be fun. Yeah. So

Andrew Stotz 00:41
let me introduce you to the audience. Imagine navigating the high stakes world of capital, strategy and legacy with a guide who has raised billions in structured ventures worldwide. Dr Thomas J Powell, founder of the Powell perspective, is a seasoned entrepreneur, investor and advocate for founders, bringing clarity, strategy and resilience to leaders building at scale. Thomas, take a minute and tell us about the unique value you are bringing to this wonderful world.

Dr. Thomas Powell 01:10
You know, Andrew in my career, of which started my first company over 40 years ago, but started investing strategically in companies starting in 92 so it's been, you know, 3334 years now. And so what we bring is a unique founder advocacy and oftentimes our CO investors in deals are also founders that have had exits. So we align capital with clarity, governance and integrity.

Andrew Stotz 01:37
And as a founder, I mean, how do founders find you? Where is the place that they you know? Where do they find you? Online?

Dr. Thomas Powell 01:45
It's been an interesting story, because, for the most part, people could only find us by introduction. I didn't have a big web presence or anything out there. We that was actually part of our underwriting of both our investors and the deals that we looked at was Who introduced you to us, and kind of the best known secret out of Silicon Valley. Now we actually do have a website. So our family office, which is called the Brahan group, led a venture now called the founders office. So it's founders dash office, horrible moniker, but founders dash office.com and that's where you find all of the services that we provide to both founders and founder investors, which is groups that we service on this,

Andrew Stotz 02:24
and how wide or narrow are your services?

Dr. Thomas Powell 02:29
Generally, they're the early stage capital raising. So generally, if a company's 10 million US revenue stream to about 100 million US revenue stream, and they're looking to scale, and they're bringing in that next stage of capital. So they're way beyond, you know, friends and family, but they aren't necessarily looking to do a round. It could be structuring the institutional capital. We could be using unique finance products that we've done worldwide through one of our arms that's very bespoke, so we can do larger deals as well. But we really love those founders that are in that range, they've got an idea. They've proven that they've got a market and they're able to grow it. They just don't realize that bringing in capital is a full time job, and as investors, it's oftentimes they've exited a company. They've got, you know, 1015, 20, 100 million more than that, sometimes, and they want to go invest, but typically they're finding the investments were which were them, so they're identifying the founders, that was just them, and they don't have any framework of what to do. So they end up either losing a lot of time or a lot of money, or both, because they don't have a specific investment and they're just bored of doing institutional investment. So, you know, they're like, that doesn't fit me really well. I want to have more control. So those are the two groups that we really service

Andrew Stotz 03:42
and what is the investor looking for at that stage. So you've got, actually, you've got a few different stakeholders. You've got some original, let's say angel investors and others. And some of them may say, Well, I've had enough of this ride. Can I somehow figure out a way to get out? And others say, No, I want to continue this. But that's on the original investor side. Now you've got new investors coming in. Are these new investors saying, I want to, you know, be with this company for life, or I want to do help them get to the next or I want to help them list, or I want to help them what? Or I don't want to help them. I just want to put money in and get a return. How does it look there?

Dr. Thomas Powell 04:18
It's all across the board, Andrew, because sometimes it is the and the the easiest, but also the worst investor is the one that's I just want to return, right? And I'm going to get in and get out, and that's generally where we in a capital alignment model. What we do with the founders and with the investors on both sides, we get them to match what's the problem that's being solved. So one of the books you've got all your books on the background, the richest man in Babylon, is one of the books that I just absolutely love. And it's because it's so simple. It says, invest in something you know and understand, and then invest with people that know and understand what it is they're doing. So we use the scenario of, do you understand the problem that's being solved, and if you understand the problem that's being solved. And then the solution is relatively simple, even if it's complex, but it can be described that probably will be a decent investment. And somewhere down the line there's going to be some liquidity event so you can get back out.

Andrew Stotz 05:11
And, you know, I'm just curious about it, because it's some there's two things I was thinking about. You know, some may say to the investor, the investor, or, sorry, not the investor, the founder may go, oh, I can do this myself. As you said, you know. And, and that's, that's one thing. And then what, what I was also thinking about is, like, what, what is a what should a founder expect at this point, you know, they're at this level. They're talking to these types of people, you know? So maybe you could just address those two things. I'd be curious to hear what you'd say.

Dr. Thomas Powell 05:42
So the founder oftentimes will think, you know, they've had some they've had a lot of success, in many cases, especially if they've grown a company to $10 million throwing off cash. They're usually living a lifestyle. They've moved into a space that we named partial academics. So of course, we have to name things. So we've named this the founders isolation paradox, which is where the founders grown the company to the point that they have these advisors, usually their C suite of people. They have these outside counsel, outside accountants. Their spouse probably helped them start the company, and none of the and their banker and none of those people in their sphere are actually aligned. So at 2am the founder is sitting there looking up at the ceiling, still trying to make decisions all on the decisions all on their own, because none of them have all of that. So that founder that's gotten to that point also has had a lot of success, because a lot of times they deem themselves the smartest person in the room. They've been able to get it going by grit. They've been able to figure out what regulatory problem, whatever it is. But they come up to this barrier, which is now capital starts becoming more sophisticated in most cases, and so and it needs to. And it's larger dollar amounts. It's not just your mom lending you her credit card to start the company, right? So it's like, how do you grow this and how do you align it so that it actually matches the goals of the company in the short term and in the long term? And does it match the executive team? Does it match the founders? Where do you have to look at that caps, that cap table, and all those pieces come in and and if you go talk to a lawyer, in most cases, they're going to know some of that, but they haven't even actually ever done all those processes themselves. That's part of where we come in, and we're actually the founders advocate. And to take a back story, and in 92 as I'm coming out of Silicon Valley in the 80s, working for a large bank, we were seeing more and more founders being kicked out of the companies by the money. And having been an early stage founder myself, I'm like, Okay, how do we help coach these founders where they're never generally going to grow into being a professional CEO, but they can find the right way to lead and guide a team and grow that company and get a good exit. And that's been our story since 92 interesting.

Andrew Stotz 07:48
I own a business that's about at the revenue level that you talk about, and with my best friend Dale, who's been running it, coffee works. It's called for, you know, we've been running it for 30 years. In fact, tomorrow I'll sit down and it's the 10th tomorrow, and we'll review the financial statements of the prior month, and we close the books on a monthly basis for 30 years. So we have that part in good shape, but, you know, it's gonna it's interesting to talk to you about it, because it makes me think, yeah, you know, there's a next there's another stage of growth that requires first capital, but probably also new thinking. And I think every business ultimately ends up being a one man show. It's just a question of, how long can it survive as a one man show? And if you want to expand your business to be 100 million in revenue, you can't do that as a one man show. And so, yeah, yeah, fascinating. I appreciate you sharing your experience on that. So I think for the listeners and the viewers out there, make sure to check out the website. I'll have links in the show notes so you can, you can get there. But 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 circumstance and leading up to it, and then tell us

Dr. Thomas Powell 09:01
your story. So it was a fun time. We were just in the midst of actually coming off. So my daughter, who, again, runs our family office, she's like, Oh, Dad, Yeah, Dad, you have to talk about the, there's a, there's a podcast out there where I'm talking to Joe Polish, and it's where, you know, we I lost $400 million so of course, that would be the one we should lead with. But that's not the one that's not the one that's caused me a lot of my aggravation of, why did we do this? And so we have an investment in cannabis. And the backstory on that, whether you're pro or against cannabis, the backstory was my kid's grandmother had gotten breast cancer, and the only thing that really worked with that whole treatment pattern was cannabis, and cannabis was just becoming legal in a couple of states for medical marijuana. And we're like, need to help this get done, because this does really seem so let's invest in this. So I had a lot of other things going on. I had a friend, which is problem number one, because. Then we bypass some of the checks and balances that we always use for investments, right? The friend bring me the deal, and then I turned it over to my team and said, put this together, and we structured it in a really brilliant way for them to be able to grow their company, but in doing the documents, they didn't put some of the typical governance pieces in there. And so it's not, it's not a huge investment for us. It's about $3.6 million it's not a small investment, but it's not, you know, it's just an irritating investment because it's a friend that I got to look across the table with all the time. And so part of the challenge was, as it went on, and I started taking more time and looking at it, I start bringing in the governance pieces. And I'm like, Well, if we haven't caused these governance pieces, the, you know, binding pieces that we look at with this to be done in the covenants, how can we go ask now, because

Andrew Stotz 10:53
three, four, what does governance pieces mean? Rough. I mean with, I'm not asking you to give out secret details, but just what does governance pieces mean for someone that may not understand that term?

Dr. Thomas Powell 11:03
So it's in our documents. We put how often they were going to report that they provide the general ledger to us so we could do an external audit on their auditors that they would actually use true gap financial, you know, financing regulations, which is hard because cannabis is not regulated under gap, right? It doesn't have federal but it was very important to say, Okay, we still need to meet this for our own investment strategy. So we call those

Andrew Stotz 11:32
accounting for agriculture is really difficult, particularly intellectual property related to breeding and genetics. It's incredibly complex,

Dr. Thomas Powell 11:40
all of that, all of it, right? And then we go through covid As part of this, right? So all of these scenarios are within there, but we do have the governance in our documents. So again, they're items that say, Hey, they need to at the end of the quarter, they need to provide financials to us. Well, no one checkboxing that, because it's one of Tom's personal investments. Then what ends up happening is all the systems and frameworks we put up around everything else, and 3.625 is a big enough investment that it pisses me off. So it's like, now I'm wasting time and money getting back in there and steering the ship, and then we get into the second part of this is you need to have people that are licensed, and I have no desire to get a cannabis license, right? So if we take over the company, we're at a scenario of where do we actually have to find next cannabis person? Which gives you a small market, which, when you only have a small exit market, you lower your prospects of how you're going to exit. It's how to have the leverage of driving this. And again, we did this as a shared appreciation loan, so it wasn't a pure equity deal, but normally we take a seat on the board. We made so many errors, and the main one was Andrew. We didn't follow our framework. We have a framework, and because it was a friend friend, we stepped outside of that framework. And then the checks and balances that we have, we didn't feel comfortable doing that again. So the overall arching thing is we never lend to friends, right? That's a narrow unless it's the same by, you know, they say Good fences, make good neighbors, good documents, keep good friendships. Yeah.

Andrew Stotz 13:23
So what I want to do, I mean, you've said a lot of stuff there. It's a bit repetitive, but I really want to go back and have you summarize the lessons that you learned.

Dr. Thomas Powell 13:31
123, First, verify alignment. We've talked about that earlier. We talked about that even pre show. What is it in the storytelling. What problem are you solving as the founder and as the investor? What problem are you thinking they're solving? And is there alignment in there? And is there an alignment on what the process is to get capital? Now, we can't control covid. We couldn't control, you know, 911 all these things that happen, markets happen. But if everything's going along the line, are we still aligned of what the deal is? And so one very, very simple test that we use is we use the when will you sell? And so my scenario is, if this business now was worth $25 million would they sell? And if the founders say no, and we don't have any triggers for that, I'm stuck getting carried along there. And so I tell this to, you know, I taught this to my daughter years ago. I said, every time you get an offer and you don't take it, you just bought it for that price. So somebody came in and offered us $25 million and we think it's worth 35 but would we pay 25

Andrew Stotz 14:38
for it? So when you're saying, When will we sell? You mean, as a outside investor, when would you sell? Yep, okay, all right.

Dr. Thomas Powell 14:48
So, so that's the verifying the alignment. The other one is really, really understanding and watching the hubris. And this is difficult in some sometimes, because we've got a large Legal Group and large. Learning group. And you know, bunch of smart people educated all over the world, from Harvard to Northeastern, north, you know, I mean just strong, strong minds. And so, know, the legal and the regulatory landscape, and we all it's, you know, it's like looking around the corner. Can you see around the corner? And who has that insight? Because somebody's been there. And then the last one is really, what are the enforcement mechanisms for accountability? So in the cases of like when we make a loan, let me say your financials are due to us on the the end of the third quarter, at the last day of the final month. And if you don't have those, you are in a default on the loan. And these are then the points that go down there and and the last one I'd say that works really well outside of the United States is arbitration outside of the United States works really well. Arbitration clauses in the United States are crap. So arbitration, for the most part, in your international they set up the rules for arbitration before you go into arbitration. You've already picked, hey, we're gonna pick one arbitrary. You're gonna pick the other one. They're gonna pick third. We're gonna arbitrate it in Spain. We're gonna use Spanish law. And you're in Thailand, and, you know, we're here in Germany, and you set up those rules for divorce before you ever do the deal in the United States, they just say you'll go to arbitration,

Andrew Stotz 16:20
which is a whole new battle,

Dr. Thomas Powell 16:21
wow, yeah, it's

Andrew Stotz 16:23
interesting, because when you're operating globally, you kind of have to figure out, okay, what language, yeah, what legal structure, what legal structure, yeah, where do we want to be?

Dr. Thomas Powell 16:33
Where do they have their assets? Because if you all of your assets are in Thailand, and we take you to court in Spain, because that's what we agreed to in Spain, but that doesn't do anything for us

Andrew Stotz 16:42
in Thailand, yeah, yeah, interesting. So it's the same way

Dr. Thomas Powell 16:45
in the US, because we have 55 terms. And if you know you're in Nevada, and you're in all these other areas, and all the assets are in Nevada, but you don't sue them in federal court, and you sue them in Wyoming, you can't really easily get to the assets in Nevada.

Andrew Stotz 16:58
Yeah. So you mentioned alignment, and he talked about watching for

Dr. Thomas Powell 17:02
single and regulatory landscape, and what triggers do you have to enforce accountability?

Andrew Stotz 17:08
Yeah, that's great. That's great. And one of the things that I was thinking about is, you know, one of the things that I see, particularly with startups, is that they are underpaying themselves. And what, what happens there is that, as an investor, you have to make sure that they're paying themselves market price. And as I tell people, I said, when I give presentations about valuation, I always say, they ask me, how do we increase the valuation of our company? I said, double your salary. Yeah, and they're like, What? How could doubling our salary do that? Because it would put you in loss. And then you realize, holy crap, we're not paying market rates. And therefore, what's going to happen when a buyer comes in is they're going to say, okay, yep, well, we're gonna have to double all these and we have to take into consideration, you know, how would we run this if you weren't there, and you you're licensed, and we're not, and we're gonna have to figure that out. And this just reminded me of that. So for the people out there who have a startup or a business, you know, double your salary, and that's, that's a big one.

Dr. Thomas Powell 18:03
Well, I think, you know, Andrew, I think that says something really, which we try and do in our, in our founder advocacy, is being the employee, is a job that's a salary, compensation plan for that. Being the founder, being an owner, that's a position that's different. So you and your partner go meet, and you go over the books, and if he's working in the shop all the time, he should be getting a salary for doing that. And then separately, you guys are taking out your ownership pieces in that. And if you're bringing some other value that's paid for that time versus exchange of intellect or whatever, that's one deal. And when you can segment that out, you do prepare yourself better for an exit. You also prepare yourself just for better management.

Andrew Stotz 18:45
So let's go back in time and think about a young you know you in that situation. So let's imagine that person today is you know, their friend comes up or a deal comes up. So based on what you learned from this story and what you continue to learn, what one action would you recommend that person or our listeners to take to avoid suffering the same fate?

Dr. Thomas Powell 19:07
Just one action, if we looked at it as the primary failure, was that we didn't align the capital and the exit well from the beginning, and it didn't get documented well. And I'm not talking about 35 pages written by the attorneys. I'm talking about back at the napkin. Here's the three points that we need to get to, and we can define those points. That is the most important part. I think it makes for a good marriage. I think it makes for a good investment.

Dr. Thomas Powell 19:35
Great.

Andrew Stotz 19:36
And what's a resource you'd recommend for our listeners?

Dr. Thomas Powell 19:39
Well, I'll tell you. Well, first I would say, if you haven't read The Richest Man in Babylon, it's like, one of the simplest books out there in the world. But it's been around for, you know, a long time. I think it's 1960s is written, maybe even before that. I read it when I was pretty young, and I just love it, that it's like, invest in something, you know, don't get caught into. And we've taken. To another step. Invest in a problem. You understand that needs to be solved. So you don't have a coffee shop. And if somebody's going to do a coffee shop there, and you know that everybody's on that corner, great. You understand that. Go do the problem, the cannabis, various pieces in there. The second one is, we call it the bigger pile theory, or we call it the bigger pile theory, which is, take advice from people that have a bigger pile than you. Don't take it from people that don't have a bigger pile than you. So meaning, if so, find people that are really know it. Don't just theorize on it, but they know it. They've been there. They hopefully can see around the corner. And the third one is, we've got a pace that whether it's a founder. So let's say you and your partner want to raise capital. You can go out to our founders, dash, Office website, and you can take your pitch deck through and we'll give you a benchmark of where you're strong, where you're weak, and what you should look at, which goes through our investment framework. We also do that for investors. So if you're investing in a private company, even a public company for that matter, but you want to take their pitch deck and run it through our system, we'll tell you where we see it align in a strength and what weaknesses in that area. We don't give investment advice off of it, but we do say these are things you want

Dr. Thomas Powell 21:08
to look at. Great, great advice.

Andrew Stotz 21:11
Yeah, and we'll have that link in the show notes. By the way, the rich man in Babylon was written in 1926 Yeah, it was. It's an oldie. It's an oldie. It's a great part. Yeah, definitely. All right, last question, what's your number one goal for the next 12 months?

Dr. Thomas Powell 21:28
Wow, my wife would say it's about skiing, because I ski about 100 days a year, but we actually were. We've started a founder and founder investor cohort program through the founder's office, and again, it was my family led to take the intellectual experiences I have of over 40 years and putting it down into a model where people on both sides of the transaction so we can have a capital alignment. I am a fierce free enterprise saves the world person. I'm dual citizen EU and US, and work through Asian and other, you know, South America. And I just love our founders. No matter where I go in the world, I was good place down in Tanzania, not that long ago. And we had all sub Saharan founders come to our house in Lake Tahoe, not all of them, but we had a large group come to our house in Lake Tahoe and spend a number of weeks with us. That was fascinating. So I love working with founders. I love working with the founders capital, the people that have had an exit and they're putting the money back in and aligning that capital.

Andrew Stotz 22:29
Yeah, free free enterprise, free markets. Great stuff. In fact, I kind of it's kind of sad where it's gone. I mean, I stand up in front of people now, whenever I speak, I say, I literally stand in front of them, and I say, I'm a capitalist and profit is my passion, and they can't. They're like, Oh, my god, somebody said it.

Dr. Thomas Powell 22:47
Yeah, no, yeah,

Dr. Thomas Powell 22:50
I lived it. It took me out of poverty. I'm very thankful for that model, and it took us all out of poverty. Yeah? Absolutely, absolutely

Andrew Stotz 22:56
fantastic. Well, listeners, there you have it. Another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, Thomas, 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?

Dr. Thomas Powell 23:18
You know, I go back to my kids. When my kids, I have five kids, so when the youngest one, I'd say, learn ope other people's experiences. So when you see your sister, your brother do something really stupid, don't do that. So this is a great opportunity, because we don't learn from the wins, we learn from the failures, right? So the ope is just an amazing way to do it,

Andrew Stotz 23:38
and that's the way to reduce risk in your lives. Well, that's a wrap on another great story to help us create. 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 that I will see you on the upside. You.

Andrew Stotz 00:01
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, and I want to thank you for joining this mission today, especially my listeners in Miami, Florida. Fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Dan novayas. Dan, are you ready to join the mission?

Dan Novaes 00:40
I'm here and I'm ready. Yeah.

Andrew Stotz 00:42
I mean, your company is so interesting that I'm excited to get into it. But let me introduce you to the audience. Dan is a co founder and CEO of mode mobile. He's leading the transformation of how people interact with technology. His earn as you go software empowers millions of consumers to turn daily habits into passive income. Under his leadership mode, achieved 32,000% revenue growth from 2019 to 2022 and ranked number one in software on Deloitte technology fast 500 in North America. Dan, take a minute and tell us about the unique value you are bringing to this wonderful world.

Dan Novaes 01:26
Yeah, well, thank you, Andrew for the awesome intro. So yeah, we are adding value by helping the people that are using their smartphones every day. Average person today spending about 40 to 50 hours a week. As you know, there's about 168 hours in a week in total. You know, if you're sleeping in hours a day, there's only 112 left, and people are spending 1/3 to one half of their waking life on their smartphone. And at the end of the day, the people that are making trillions of dollars on this is big tech, and you're getting nothing, because if the products free, it means that you're the product. And so we really flipped the model upside down, and really is this idea of rewarding people for the things they're going to do. So that could be playing games, reading the news, trading stocks, depends on what your habits are, and so very similar to what Uber did for cars or Airbnb did for homes, we're doing for the smartphone space. Obviously you're not going to earn as much as you're going to earn from your car or your home, but not everyone has a car or home. Everyone has a smartphone around the world, and we tend to focus on those budget conscious consumers. So at high level, that's what we do. You know, we have 10s of millions of people around the world that have used this software to take their smartphones, turned them into earn phones. We also launched our own earned phones and got them into major retailers like WalMart, Best Buy target and so on. And now we're starting to license this technology to other phone makers and carriers so they can launch free phone plans and phones that pay you as you use it, and we believe that to be the future of the mobile sparks in space

Andrew Stotz 02:47
interesting. And if you go on your, let's say iPhone, you know, I'm sure it's the same on others, you can see, oh, geez, in the last 24 hours, I've spent X amount of time on this app, X amount of time on this app, X amount of time on this app. What is it that you know? What is the model, or the revenue model here? What is it that's valuable? Is it your, where you're spending time, or what you're doing in that time? What is the value? Yeah.

Dan Novaes 03:11
I mean, your value is your attention, right? Your attention is actually your most valuable thing that you own. And I think that if you go and look at the platforms, you know, you're spending that attention, and as you're scrolling those news feeds or reading those articles, there's advertisements that are popping up. So our model operates in a very similar way, you know, we know that people are going to do these habits, you know, and these are everyday services. So an example is, you know, someone likes to play games. We know they're likely going to want to play Candy Crush or, you know, Clash of Clans or whatever, and that advertiser might want to pay, you know, to get that consumer to do that. And so what we'll do is we'll reward you per minute that you play Candy Crush for, say, like a week you build a habit. It's a win for Candy Crush. It's a win for you. You get a little bit of reward. And we take a margin for doing that. But we'll do that across every facet of you know, someone's life, you know, news or stocks you know. So Robin Hood is another example is they want traders to deposit at least $5 into a brokerage account. They may be willing to pay $150 for that action. And once that action is complete, we will share $75 maybe to that consumer, and they'll get about $30 in free stocks. So you know, now the consumer gets 100 bucks. They're very happy. Robin Hood gets a brokerage account, and then we get a margin from that. And so that's very simply how the business model operates, you know, at the base level.

Andrew Stotz 04:27
And just maybe even simplify it a little bit more, for the revenue model, who's paying you for the value that you're delivering? That's Robin Hood or

Dan Novaes 04:38
Yeah, Rob, yeah, Robin Hood is paying mode. Mode mode is then sharing a portion of that revenue back to you, the consumer, for taking that action. And you know, it's say, it's a 50% rev share. You know, it depends on the action the consumer. But you know, we might take half of that $150 and so it's 75 for you, 75 for me. And then I. Robin Hood gets the action that they want, right? And so it's always the advertiser, and vast majority of our revenue is advertising centric. We do have a subscription model, kind of like how Costco operates, where you can earn faster, you know, if you want to, you know, pay for that, but it's optional. And then now, most recently, we started buying a lot of other apps and services and embedding them into our ecosystem, and kind of doing what you would see in like a PE roll up, you know, we see a lot of great cash flowing apps and games, and we're buying those and also exposing consumers to those, and vice versa, those consumers to our product.

Andrew Stotz 05:35
And for let's just take Robinhood for a second. If they didn't have you, they would have to go, let's say, on Twitter, x, and they would do advertisements, and they would capture that same person. Let's say, let's say it's me. I'm on there, and I see an ad for Robin Hood, I click on it, and I sign up, and I set up an account, yep, now they've paid Twitter or x to get access to the platform, and then put up their ad. And so really, what in that case, all that ad revenue is going to Twitter, correct?

Dan Novaes 06:08
Yes, in that case, but the way that advertising generally operates, it's like, we deal with this ourselves, you know, we spend, you know, millions, 10s of millions of dollars a year on advertising. And ultimately, you know, there is an efficiency point that beyond a certain amount, it no longer makes sense for me to advertise on this given network. It just because the competition gets too high and it gets the payback period is too long. So that'll happen on Twitter. So typically, the way to think about this is, like businesses that are trying to grow, they're trying to find consumers that fit within the budget that they have to acquire a customer, whether they can get, you know, 20k a month in good spend with us, and 100k a month in Twitter, that's that's fine, because at the end of the day, all that's profitable. And, you know, we're not getting paid for a user that's already has gone to Robin Hood. So it's a first time user. And so basically, they can attribute that to us as the original referrer.

Andrew Stotz 07:05
And is that the ideal, or the only type of advertising that you do, which is where you can show proof that that ad, that that I, those eyeballs, led to actions, or is it just eyeballs also,

Dan Novaes 07:17
um, it's a that's the vast majority, where there's proof that there is some sort of action that's, you know, correlated to that. Other ones are maybe display centric, where, hey, like a display advertisement occurs, and then we are charging on a per view that's occurring. But, you know, the vast majority of our network is performance centric, meaning that some sort of action must be taken for that basically proves that, hey, we are the original referral of this traffic.

Andrew Stotz 07:46
And do you get any blowback from the platforms or the apps that say, Hey, that's our ad revenue, and you know, you're, you're, you're grabbing a piece of that, or do they don't see it that way?

Dan Novaes 07:58
They don't really see it that way. Because, I mean, at the end of the day, you know, it's pretty cut and dry, you know, at the end, because all these things, like any good marketer knows where the referral traffic is coming from. I mean, obviously there's organic traffic, and you don't necessarily know where that is, because it gets, like, stripped, but that's a problem that everyone is going to have. But, you know, the Facebooks of the world. I mean, they are automated platforms. You know, at the end of the day that you're going in there and buying just traffic against

Andrew Stotz 08:27
and just one last thing on the let's say on the user side, what's the ideal type of person that should download your app and do it? Let's say, you know, obviously, if somebody's not on their phone much, or, you know, that type of stuff. Probably they're not going to get much out of it. But if somebody is on their phone all the time and they're doing different things, what would be the ideal person or the ideal user that would be suitable to get on to download your app and get benefits and get, you know, get returns from it?

Dan Novaes 08:58
Yeah. So, I mean, our main users tend to be more budget conscious consumers, and people coming from emerging markets are primarily the people that are using our service. Now, what's interesting is that, you know, we before the show you and I were talking a little bit about this, but we have a we're one of the largest like, crowdfunders in America, retail crowdfunders, and so 70% of the people that actually investing in our business tend to identify as boomers, meaning they are older than 55 or 60. They are not my target market at all. They tend to be wealthy. And so what's interesting is that we are getting a lot of people that are not in our target something at all, that are interested in participating in the mission of the business, even though they themselves are not the exact type of consumer that's going to use it, because they saw the transformation of what happened with the iPhone in 2008 and this like one of the first big business breakthroughs, I would say, in, you know, the smartphone space, this new business model that's kind of operating so, you know, while people may not be our consumer, they see kind of that opportunity. And we started with budget conscious. Because. Yeah, you know, if a free phone or free smartphone plan is a really big opportunity, you know, this is something where there's 6 billion devices around the world. If you can unlock that market, it's a trillion dollar market. And so, you know, we tend to focus there first, and then over time, you know, you focus on products that are focused more on the wealthier individual, but they're going to naturally care the least about, you know, making a few extra $1,000 in savings a year, you know, as opposed to people that are really struggling to make ends meet, you know, which is happening with the rapid inflation that we have right now in the

Andrew Stotz 10:33
country. And when you look at your business, you know, what do you think is the revenue potential for something like this? I'm not necessarily asking for specific numbers, but just the idea, like, I think we can 2x I think we can 20x you know, like, where, where do you see the future for this type of business? Your business?

Dan Novaes 10:52
Yeah, I think our business is a is a really unique business, because, you know, at a surface level, you know, we've really focused on this idea of the earning as you go, and the Earn OS and whatnot, I think, like where we've really innovated on the way we can grow and and why I see that there's a, you know, 1,000x opportunity, is because we're also in the business of, of taking a business model that's worked quite well for almost any other industry, because We are going out and buying other apps and services that fit within our mandate, and those are typically businesses that we're buying for two to 3x EBITDA, and kind of taking that same private equity playbook and rolling them up into one larger ecosystem. And so then you're building a network effect, right? So anytime that you could do that and use capital efficiently to do that, you know, that's really powerful. And for us, like, you know, if I, if you ask me this question maybe two years ago, you know, something that's been really important to me is, like, I don't want to extend the payback period that we just talked about, you know, because in the past, I had gotten down that that was one of my worst investments. Actually, it's not the one we're going to talk about today, but that was one of my worst investments, is basically growth at all costs. And, you know, we had extended payback periods, six, nine months, you know, before we were seeing even a break even dollar. And then when the market fell in 2022, because a lot of our revenue at the time was FinTech and crypto, and a lot of these companies went bankrupt, we were left holding back. And, you know, it almost took down the entire business. And, you know. And so the next time I was like, hey, if I ever have an opportunity to raise significant amount of capital to grow my business, I'm going to be really diligent about the payback period and only spend up until that point, and then we're going to find a better use for that capital. And that's when we started really thinking about buying these assets and buying these cash flow product, Market Fit products, building a network effect, and then growing this huge network. And so, you know, we see this as a, you know, definitely an 1112, 13 figure business, and that's my goal, to take it over time, is to take it public.

Andrew Stotz 12:49
And I feel like, I feel like I want to do a whole nother episode to talk about your funding structure, but in a very short, you know, description, you know, you mentioned the word crowd funding. And when people think of crowdfunding, like oldies like me, think that you're talking about, what's the website where you put stuff up? Kickstarter? Yeah? Kickstarter? So okay, yeah, we think, okay, crowdfunding is Kickstarter? When you say crowdfunding, you just mean that you it's mass funding. Or is there? What is the meaning of crowdfunding? And just maybe give us a little background on how you raise funding. Yeah.

Dan Novaes 13:27
So the way to think about crowdfunding is that, instead of you focusing on institutional like venture capital that are putting up, like, if you're raising a $50 million round, you may have like, two or three investors that are do that round, you are basically bringing on retail consumers that are making up that round so in our case, we have 50, over 55,000 shareholders in our business. You can do this legally. You go through the SEC, there's a reg CF, there's a reg a, these are regulations. You have to have audited financials. You have to do everything like, it's almost like a mini IPO, but you don't have a publicly traded stock price. Stock price. And then they go to our site, and it's like, checking out on Amazon. You know, X amount dollars per share, you're investing this much, and, you know, they become a part of our cap table. And so that's, that's kind of crowdfunding. And there's usually, yeah, you're, you're totally right. There's two types of crowdfunding companies in the world. I'll say there's, like, the guys that are the baby seeds, that are maybe raising 50 100k for their idea. And then there's like I would call moonshot businesses, and there's not many of them, I would say, you know, every year you're going to see about a dozen or two of these that have the capacity of raising, you know, 2550, 100 million plus. You know, through their lifetime of crowdfunding, and we are one of the leaders in that in the world.

Andrew Stotz 14:47
You know, one of the things that's interesting when you look around the world, and, you know, my job is really, what's fun about what I do is, you know, it's, I'm, like, completely global, whereas a lot of guys, like American guys. Are American centric, and then they look outside of America. But because I've lived outside, and, you know, my whole career has been outside, I kind of look at things globally. One of the interesting trends that's happening in the world is that capitalism, if stock market and IPOs are one of the signs of capitalism, it's an absolute decline in America, as IPOs continue to decline, and it's in the rise. It's on the rise in Asia, as you know now, China has more large and liquid companies in their stock markets than the US does and so and that trend is only getting you know that gap is getting more and more to China's advantage on the IPOs and all that. There's a lot of reasons not to do an IPO these days, particularly, you know, if you think about all the pressures that are on listed companies for disclosures, and then, and then you get all kinds of, you know, climate this, and you get ESG this, and all of these different pressures. So there is some benefit of, kind of not putting your head above the parapet and, you know, just but still having access through a broker, as as you've told me earlier, that if I buy shares in your company, I can also exit, you know, so I'm getting some of the benefit of what the stock market does, but without all of the, you know, additional burden, is there any downside for you of not going listing on the stock market, or is it like, Absolutely, it's much, much better to be listed versus what you're doing. I'm just curious how you look at that.

Dan Novaes 16:31
Yeah. So I think the Yeah, the ways to look at it is, like, the benefit for these investors that are investing in us right now is that they're getting in relatively early on the story. Typically, when you're IPO and you're already at a given stage, you know. I mean, there are companies that prematurely IPO because they need capital or whatever. And you know that is not going to be, you know, mode, but nonetheless, like, you know, that is something that happens quite often. The to answer your question in terms of our perspective on it, I think, like, yeah, the downside of us going public too early, and I think any company is going to be, you know, your ability to predict your revenues, any early stage business, that's one of the hardest things to do, and especially when it's a consumer business, and because if you miss your earnings you forecast incorrectly, you're going to get hammered, you know, and You're going to learn it's going to be very painful. And I think that, you know, for us, that's kind of like, why we've waited a bit. We want to be at a certain scale. We want to be able to be really thoughtful about how we predict revenue. We've already been kind of modeling that for the last, like, two years, and, you know, we're still not fully there, you know, it's like, you know, we need to be in a place where we feel really comfortable around that. And so I think that that's kind of like that discipline is what it's almost like practicing to go public is the best way describe it. You and I were talking about some other things that we do. We do, like earnings calls twice a year. We do a lot of investor monthly communications. We do all these things that I think actually a lot of public companies don't even do themselves to have that direct relationship. And so, you know, for us, we do intend to eventually take the business public, and that's our intention. But you know, we want to do it in the right circumstance. You know, at that same time,

Andrew Stotz 18:11
I just have so many questions about what you're doing on the funding. I think it's so fascinating. But for the purposes of today, now comes the big question, which is, 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 it,

Dan Novaes 18:30
and then tell us your story. Okay, and let me, let me phrase that this was my worst. It was an investment that actually still was a good investment. Happy I went through it, yep, but it was the biggest loss I've ever suffered, in terms of, or not like, I didn't gain, you know, in that sense. But it was just such an extravagant number that I feel like it was perfect for the episode. Okay, so here's the context. Our business was very early in the crypto the idea behind crypto, and in fact, we had a different type of fundraise, you know, early on, that was, like a token oriented and we were able to actually raise a good bit in Bitcoin and eth at the time. And at the time, eth was two, 300 bucks, and, you know, a few $100 and Bitcoin was, you know, a few $1,000 and during that period of time, eventually, once we finally figured out what our runway was for a period of time, we converted and did basically what the micro strategy model is today, or meta planet, which is like, Hey, we're gonna have a treasury strategy for our business. And at the time, everyone thought I was kind of crazy to do that because, but I was like, it's, it's a couple million bucks. We have three or four years of runway that we just kind of converted into cash, and we're good long term, right? And this is still with that mindset of, like, you know, growth at all costs, like, we're going to build this crazy thing, and over time that that one or $2 million Um, ballooned to $30 million and because of the price of Bitcoin, and I was on, like, CNBC with Andrew Sorkin, talking about Bitcoin just hit 10k it was like, yeah, the next five years, it's gonna happen. And we never had to fundraise again, you know, through that time. But then in 2022 we had this crazy, you know, went from 63 down to 18. And during that period of time, we had to exit a lot of our petitions because also we had the compounding effect of, you know, pressures in the business because of all those bankrupt companies that didn't pay us our advertiser fees. And so we had to exit our entire Treasury position, not almost all of it, into cash to fund the business. And had we, you know, planned better on the financial side of and not just in anything that today, would have ballooned to, you know, north of well over $100 million and we would have created this kind of treasury concept, you know, right around the same time as MicroStrategy come out. Now, we didn't like think about it in that way, but it's something that, you know, we were really early in, and it was just like, this idea of like, being kind of like, ahead on the curve, but at the same time not having the foresight of where things were going to happen. At the time, we didn't have Blackrock in and you didn't have like, all this kind of regulation going in the right way. So, you know, it worked out like it still was a very significant net positive for a balance sheet, but it was one of the worst decisions I've ever made for multiple things in terms of, like, growth at all cost, and liquidating our treasury that today would have been, you know, a pretty big windfall for the business.

Andrew Stotz 21:44
So, what's the lesson that you learned from it?

Dan Novaes 21:48
I think the lesson, well, the main lesson that I learned is like, sometimes it's like, it's better. You always need to be sensible into how you're growing. Like, you know, I got too carried away with what the market was doing. And one of the things that allowed us even to be in that position in the first place is that we never cared what the price was. We, like, literally adopted it as a treasury strategy. And we were like, hey, like, maybe over time, you know, we were actually earning some income on it through, like, you know, selling covered calls and things of that nature, which was a nice additional, like, you know, one to $2 million a year to extend the runway. But the lesson was, you know, we over levered on acquisition costs. It is over leveraged in a different way. It's not like we were over leveraging our assets, but we over levered in the sense of not being like, you know, rational in how we're thinking about taking profits or finding a profitable model in our business, and ultimately it costs us, you know, having to liquidate that early. And I know that, you know, 10 years from now, when I tell this story and that 100 becomes a bill. I mean, I'm always going to have that. I was like, Man, that was a huge error.

Andrew Stotz 22:57
So, yeah, I mean, I guess my, one of my thoughts on it is just that you have to make a decision of, you know, what is our business? And a good example is, I have a coffee factory here in Thailand, and my best friend and I run it, and he runs it basically, but we with the, what do we do with the excess cash? You know, we going to trade that, for instance, on foreign exchange. Are we going to try to make predictions on what's happening on different currencies? So when we want to import our Brazilian coffee or something like that, we do we want to take some currency position? Well, our answer to that is Nope. That's not our core business, and therefore we're going to hedge almost all of what we're doing with knowing, knowing that we're never going to get the big upside on those currency trades, but it's not our core competency. So I would say with a traditional business, it's really easy to kind of separate the core business from the cash, you know, the what we do with the excess cash and so, but as you get into a little bit, you know, companies that blur the lines as far as what they're doing operationally and other things, it gets harder. And I think the other thing I learned is that, you know, so we've had our business for 30 years. We've been through a lot of ups and downs, and from the beginning, we both felt like we're never going to get financing from Thai government, from Thai banks or anybody. We just didn't think anybody's ever going to help us. And so we always were very, very careful about the cash, because we knew that if we ran out, then we're just it's over. Like the consequences of running out was just over. And so we've survived for 30 years in with that, like, I would say, pretty low risk mentality, and those are some of the things that I'm thinking about as I'm listening you. Anything you would add to that?

Dan Novaes 24:49
I mean, I echo what you're saying. I think, yeah, ironically, I was on another podcast earlier today. And, you know, this, this whole true when I first started my career, like I've been I started. A company when I was in high school, and by the time I was about 1819 it was doing a couple million dollars a year. It was all bootstrapped e com business, doing drop shipping and stuff. And I didn't have any investors. I didn't have anyone that was like, kind of like funding, and it was just profitable, you know, and at the end of the day, didn't have parents to rely on anything. And I did that all through, you know, my early 20s. Then you get caught up in the next phase. The next phase is the VC phase. And then people are, like, growth at all costs, IPO this, IPO that. And so you get, kind of like, you see what's happening in the market, and then you get sucked in. And it wasn't until like, these kind of huge drops happen that you learn, hey, we need to get back to basics and build, like, a good business. And it'll take you a while to get that and then, you know, fortunately, you know, now we're hitting profitable months, and this year will be a bit of positive for us, but it took a lot of time, and, you know, a lot of pivots to get there. And you know, now we're thinking about a treasury strategy again, just because, you know you're not burning and you don't have to dip into that, you know, numb that, that of what you do with your money. But, yeah, I mean, I definitely echo everything. You're, you're, you're saying there.

Andrew Stotz 26:03
So, you know, part of the purpose of this podcast is to help people who are in a situation similar to what we messed up. And we want to help them, you know, think about it. So based on what you learn from this story, and what you continue to learn, what's one action that you recommend our listeners take to avoid suffering the same fate. Let's imagine they're in the exact same situation, and yeah, they've got the same type of decisions they got to make. And you know what would be the one piece of advice you would tell them,

Dan Novaes 26:33
Look, I think that the best as the saying goes, like everyone has a plan until they get punched in the face. And I think that that is the to take the deep thinking like, you know, take that moment of deep thinking every week and when things are going well, and think about everything that could go wrong, and then reassess your position of what you would do in that scenario. Because I think that if I could go back to that time when I literally had this, the best quarter we've ever had. And you read the growth stat, right? That 32,481% that was us missing plan by 50% we were supposed to get 64,000% growth, and so we still hit that. But it was the best quarter and the worst, because we got punched in the face. We got knocked out in many ways, but then, and so, if I and so, I've always been thinking like, you know, what could go wrong in all these, you know, things now, and I try and take that time and schedule it actually weekly, like I flow every week, for example, on a float tank, like an isolation tank, right to go through deep thoughts and deep thinking of these types of things. Because, you know, in your day to day, you might not be thinking about it, you know, because you're just operating, you know,

Andrew Stotz 27:50
W, C, G, R, what could go wrong? Yes.

Speaker 1 27:54
What could go wrong? Yes.

Andrew Stotz 27:56
That's good. Because, you know, you ask people that, and they're like, no, no, no, Bitcoin couldn't go down. Come on. What are you talking about? Yeah, and that's the point of slowing down too to think about that so excellent. And let me ask, what's a resource that you'd recommend for our listeners?

Dan Novaes 28:12
A resource I'd say, probably be that one. I mean, I think, like schedule that, like at least one or two hours every week of deep thinking, and you're kind of thinking, literally, put it into your calendar and take that time. For me, floating is what works. I also like go on runs and, you know, whatever. But I think that that's actually one of the things that I really wish I would have started that habit, like more than 10 years ago, like I made it just would have made a huge difference in my life.

Speaker 1 28:41
I love

Andrew Stotz 28:42
that, and I'm gonna, I just wrote down schedule, W, C, G, R, deep thinking time. I using that because, you know, we're talking about risk management. But of course, deep thinking time just generally is critical, and it's, it's harder to get when we're selling our attention

Speaker 1 28:57
Exactly. Yeah, that's so last, one last

Andrew Stotz 29:01
question, what is your number one goal for the next 12 months?

Dan Novaes 29:05
Number one goal for the next 12 months, well, we're in an interesting phase, you know, we're, we're buying a few different businesses, and, you know, my goal is to at least double our revenue and triple our EBITDA, you know. So that's what I'm focused on for the next 12 months. It's a very good goal. And, yeah, small goal, you know. And then, you know, where'd I make it happen?

Andrew Stotz 29:24
Well, I can't wait to talk about that in 12 months. 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. And as we conclude, Dan, 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?

Dan Novaes 29:51
Thank you for having me. Feel free to reach out. You know my email is down@modemmobile.com and feel free to check out. You know, anything that was interesting in the. Go and happy to chat on it. Fantastic.

Andrew Stotz 30:02
And we'll have links in the show notes, so click on those. Go check it out. That's a wrap. And 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. You.

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. And I want to thank my listeners from Texas for joining today, fellow risk takers, this is your worst podcast hosts, Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Dr Gilbert. Guzman, Gilbert, are you ready to join

Dr. Gilbert 00:41
the mission? I'm excited. Ready to ready to launch this thing? Yeah,

Andrew Stotz 00:45
let's go. We're gonna have some fun. I'm looking forward to it. So I'll introduce you to the audience. So Dr Guzman is a business strategist, systems thinker and founder of intra q Ai a SaaS solution to eliminate knowledge gaps within the workplace. And he's also recently an author of atomic impact, with a Doctorate in Business and experience in leading large teams, he helps organizations boost productivity through practical systems built for real world constraints. He works. His work bridges people, data and technology for lasting operational success. Gilbert, take a moment and tell us about the unique value you are bringing to this wonderful world.

Dr. Gilbert 01:36
Yeah. Thanks, Andrew. Well, you know, I think I'm, I'm one of those people that kind of gives that answer, of, you know, somewhat cliche of, you know, I can do everything. And being a lifetime learner, I've always been that person that spends a lot of time trying to know how everything works, and kind of this end to end world and end to end process. And so with my newly released book, one of the things that I've been focusing on is, how do we change this world of productivity? And I think the value I bring from that is with an ever changing world, AI is on the come up, we know that there's a high dependency on technology. Through that kind of lens, there's this, this opportunity to kind of maybe take a few steps back and look at the world of productivity differently and apply some of the basic principles that exist within our organizations that aren't necessarily considered when we talk about optimization, efficiency, effectiveness and enhancement. So I think being able to bring in some of my knowledge and experience and really share that with the world is really what brings value from at least my seat.

Andrew Stotz 02:46
And let's talk about your book. I've gone through it a bit to try to understand your message and what you're bringing out there, but maybe first you can just explain why you decided to write this book, and then maybe after that, we can get into why someone should read this book.

Dr. Gilbert 03:01
Yeah, yeah. So it all started when I was going through my doctorate. I think it was my third course. It was called the fundamentals of productivity, and that's where I had come across Deming, and learned a lot about the red bead experiment, the willing worker. And through that, I, you know, I've always been an operational person. I've worked in human resources. And hence the reason, you know, in my intro and kind of bio, I connect operations and human kind of that human capital round from the HR perspective. But one of the things that really touched me was I've always been in love with productivity and learning about Deming and the systems that he generated, the frameworks and the theories that are relevant today, that aren't necessarily used in kind of a formal, formal perspective that allowed me to kind of Think about, how do I grow Demings message and philosophies to the modern, modern world. And so as I was going through my doctorate, Deming actually became the framework, the conceptual framework for my dissertation. And as I was going through that, I said, You know what? I need to put more beyond my dissertation on paper, and at the same time, I fell in love with the movie Oppenheimer, and that movie kind of opened my mind. That movie opened my mind to the world of physics beyond what I learned in high school, beyond what I did in undergrad, and being able to see something as small as an atom turn into, you know, very deadly weapon. And even today, from a nuclear perspective, we can power whole cities. We can power submarines that don't have to surface for months on end. And through that lens, I said, productivity is my passion. I like science. I like what I learned in Oppenheimer and. And is there a way to consider from an atomic perspective, the small things that we do in our organizations today that can lead to massive results? Right? The Atom being split, nuclear fission, you know, control rods, all of these mechanisms within the world of quantum theory being applied to an atomic bomb. Can we find results in the world of work and productivity with the things that already exist within our organizations? And part of my dissertation was focusing on covid, like everybody else who went through a doctorate or doctoral program during covid and dealing with the great resignation, part of that was, you know, the phenomena that I had studied and tied in the world of systems and dimming. And through that lens, I was able to learn a lot that the workforce itself has changed, but the demands of customers and consumers don't. And so as we embed technology, we insert technology, you know, AI gets added into the operational framework of these organizations. We have an opportunity to consider, and I'm going to say, the investments that we put, because we know that there's investments being added by way of technology, but not so much on the labor aspect, and we know that labor, most of the time, is the most expensive line on your P and L, right? We know that if you have a large workforce, it's going to cost you a lot of money to maintain that workforce and then ultimately produce levels of productivity that meet the demand of the organization and our customers. And so knowing that there was this lacking workforce, whether it was caused by covid and people leaving their industries and not necessarily returning, or the gig workforce, the gig economy increasing, and then you layer on the great resignation the workforce that we depend on to meet the demands of our customers changed. But the major question I had was is, how do we how do we take something very small, the things that our teams are already doing, whether we decide not to invest in human capital, or we think that there's an opportunity to eliminate positions, because we answered this technology, how do We take the small contributions that they make and create something meaningful out of them, and make sure that the contributions that they do have are relevant to the world of productivity, so we can meet the demands of our customers and consumers.

Andrew Stotz 07:35
It's interesting about the great resignation, because I don't think that happened in Asia because we didn't have, we don't have central governments that have tons of money that lavish it on, you know, that they don't pay out anything. So there was no major government support, and so everybody was trying to hang on to their jobs at the time of covid. So it's interesting. You know, the difference is there. Let's talk about, what do you mean by productivity? Because I know you talk a little bit about that, and sometimes, when I look at the world, I think, wow, so productive. When I look at, for instance, the production of this, you know, iPhone that I have, you know, it's incredible, incredible level of productivity that goes into them. And then when I look at the productivity of the education system of the US specifically, I think, what a disaster of productivity. And then sometimes I look at, as I was just talking to my students recently, I said, you know, when I took French back in seventh grade, you know, there was, there was a limit as to how much I could get in my head. I didn't really enjoy the topic very much, but, you know, I was able to get something out of it. But I wonder for a kid now, many decades later, are they able to get French into their head a lot faster and more efficiently, or pretty much the same? So what is productivity and why, you know, why do you talk about productivity? Yeah,

Dr. Gilbert 09:03
so I talk about productivity, and at least considering, from the normal kind of formula, right? That outputs divided by inputs, whatever you input, the effectiveness, or even the efficiency of producing the results. those outputs actually tell us how productive we are, right? And we know that that normal formula of outputs divided by inputs, to me, is outdated, right? And I think because the concept of productivity, even just that simple formula, doesn't necessarily apply everywhere, right? And I think you just gave those examples of, you know, the iPhone, we know that we're productive there. But when I think about productivity, it's what as well. I think about the investment that companies, organizations, organizational leaders make into the organization to then create those outputs. And so with that realm of productivity is. So how do we get out? How do we get out what we need from the investment? And within my book, I talk a lot about productivity to the degree of actually, I kind of generated a new formula to count what I call the chain reaction coefficient that helps drive a different level of measuring productivity beyond the outputs divided by inputs, kind of formula, because there's, there's primary benefits within an organization of what you're doing, their second secondary benefits, which may be, we've boosted morale, right? But how do you measure those things to create an actual number in and actually account for everything that our teams are doing. Because when I look at a system, usually and sometimes we can, you know, chalk a system up to being a process. A lot of people think about systems linearly, step one through 10, or this is connected to this area, x is connected to y, and then this produces that outcome. And through the lens of atomic impact, can we account for those small, you know, what are the primary benefits we get out of what are we doing, what we're doing, and then what are some of the secondary benefits? And then what's our network reach? How do we reach more people? Because I, you know, depending on the organization. You know, I worked in a big box retailer for a while, and we always said, if you ever want information to die, give it to this level of person. And that, you know, kind of showed that network reach. Sometimes we're killing people's time. We're taking time away from people where they could otherwise be more productive or provide more inputs in a certain area that actually is meaningful, but through the world of KPIs and measurements, we get tied up and chasing the number, and then we forget about the inputs the work that we should be doing to ultimately, you know, meet the demands of our customers. Or one thing I always say is sometimes we forget about the intent of our jobs, because we get so caught up in trying to turn a red box green right, get that check mark, meet that KPI, and we forget, oh, wait, I was actually supposed to do X, Y and Z, and so that kind of goes all the way back to the, you know, the chain reaction coefficient formula. Because if we can determine what our primary benefits are or secondary benefits from whatever we're inputting, whether it's a meeting, whether it's a, you know, schedule optimization, whether it's in a direct investment of technology, and then determine how that those primary and secondary benefits actually reach how far down the chain, then we get to drive productivity from a different level. And then, you know, the last piece of that formula is the direct investment, that can be time, that can be money, and that's all going to be dependent on determining what those primary and secondary benefits are to then layer them in to determine, you know, how do we actually meet the demands of what we're trying to do. So I think, I think that's kind of the world of productivity when I think about it.

Andrew Stotz 13:07
And maybe I'll just add in Dr Demings description of a system was a network of interdependent components that work together to try to accomplish the aim of the system for the audience out there that may not know that. And so we have, you know, lots of different systems, and let's say, in a business, what's interesting about what you've written is, you know, there's, there's a great book, in fact, it's over my shoulder, called atomic habits. And atomic habits talks about, what small changes can we make in our daily habits that could have significant, let's say exponential, impact on outcomes. And what I found interesting about your book was that it took that same kind of concept and said, Well, if we really are saying that the system is responsible for the majority of the output, not necessarily any one part or any one individual, then that means that there's a multiplying effect, or an exponential effect, if we could make some improvements on the system. And that just got me really excited when I read that, because I just felt like you made a little connection there. And I have some consulting clients that I work with, and, you know, I do work with them about the system, but the idea is, like, how, where is the leverage point that we can focus on? So I think that really unique about what you talked about in the book. So maybe you can talk a little bit more about that, and let's, let's think about it for the listener right now, like something that they could how they could apply this in their life today.

Dr. Gilbert 14:48
Yeah, so I think referencing, and I did see atomic impact on atomic habits on your shelf back there, and you know, and I wanted to make sure to give you know, James clear his his full. Hours, because he did a phenomenal job with a atomic habits. And, you know, I wanted to look at it through the lens of dimming, right? And you know how dimming, Deming said that 94% of the problems, or, you know, in an organization, is the system. It's not the people. And I wanted to focus on the system, because as you start kind of opening your mind, especially if you read, read my book, and you start opening your mind up on how everything is connected, and whether it's people, resources, finance, technology, everything is so connected. But at the same time, you know that we can kind of blame, you know, we can blame the Wealth of Nations for this, that division of labor has kind of created these, these silos, if you will. And the organizations themselves are effectively a system, and they're somewhat disjointed, because not everybody's talking to each other to find those leverage points and and how do they leverage each other's knowledge, resources, whatever, whatever is necessary to come up with an answer. Because one thing I always see is a lot of people are great at identifying problems, but they're not necessarily great at finding the solutions to those problems. And through the system lens, we have an opportunity to leverage Demings thinking, systems thinking, even the, you know, the chain reaction coefficient, and slow down and determine, where are those leverage points, where are those atomic actions? And utilize those to see if, do we already have the answers to our problems in our organizations, but they're just, they're invisible, right? Or they're, they're, they're seen as not big enough solutions, because most people see big problems, so they assume that we need big solutions. And that's not always necessarily the case. That's, that's, you know, I think that's kind of grand thinking, if you will. But there's an opportunity to take in from my book some of the things, and one of the things that I do within the book is because I, you know, through the lens of the phrase atomic is, I reference a lot of physics, quantum theory, built on Oppenheimer and, you know, diving into quantum theory and trying to create analogies through the world of physics and how we got to Creating the atomic bomb and nuclear power, nuclear fission, and considering things like your control rods, right in our organizations, or at least in a nuclear reactor, we got to have control rods to control the power within that within that nuclear reactor, to make sure you don't have meltdown or we don't fizzle out. And so in my book, you can take some of those same concepts and reference them as tools to kind of push your organization and make sure that you have all of these leverage points within your organization today. So for example, the control rod aspect is, do you have control rods? Do you have things in your organization that help you monitor the progress that our teams are doing beyond the KPIs, beyond the performance reviews. And through that lens, I think if you take in the concepts of the atomic productivity theory, the chain reaction coefficient, fission actions, control rods, and think about, again, taking a couple steps back, and thinking about what exists in my organization today that I'm not currently leveraging, and then consider it doesn't take a lot of investment, right? It doesn't take a lot of investment, because most of the time it's already there. It's just being able to find it and identify it. Because with the world of technology, we want to move faster. We want people to produce results at, you know, a higher clip than ever before. Because demand is fast. The world is moving fast. So I think you can leverage a lot of that from my book.

Andrew Stotz 18:46
Yeah, and you reference Adam Smith. Now we're almost at the 250th anniversary of the publishing of the Wealth of Nations. And the quote related to division of labor that I think is interesting from the Wealth of Nations that you reference is the, he says, the greatest improvement in the productive powers of labor, and the greatest part, a greater part of the skill, dexterity and judgment with which it is anywhere directed or applied, seem to have been the effects of the division of labor. Now one, one of my takes on this, in fact, is that division of labor is a powerful element. And some people would say that that silos people because it puts them in their areas. But I would argue with that and say that actually, the workers who are, you know, divided up and working in the area of their expertise or their skills, they still want to communicate with other people in the business. They want to be part of a larger, you know, a larger outcome. But the problem, I think, is lazy managers, who then say, they just say, Well, I'm just going to reward you on this. Yes, and we're just going to focus on your output, and they don't get them involved. And as Dr Deming says, you know, if you ask me to wash this table, I can't do it, unless you tell me what this table is going to be used for, then I know how I need to contribute to that final outcome. So that's a little historical thing related to the Wealth of Nations. But what are your thoughts about? You know this about? Maybe it's managers laziness, managers trying to simplify but actually destroying. Or do they understand systems thinking? What's the state of managers these days, let's say in America.

Dr. Gilbert 20:43
Yeah, I think that's a good question, and I don't, I don't know if it's necessarily laziness, you know. And I think going back to Deming, you know, Deming said it's management's job to fix the system. And I think when we talk about that, a lot of managers are more so doing their job, and that may be pushing individuals. And actually, you know, how do you manage versus leading? How do you know, leading is influencing individuals to achieve the goal and use the systems, tools and resources, and management is making sure that they're using them and using them correctly. And I don't think it's necessarily laziness or anything to that degree. But I don't, I also don't think that when we onboard a new manager, we're not teaching them the systems, because we assume that they should already have that experience, or at least that knowledge. Because ultimately, if you're whether you're coming in, you know from an external hire or an internal hire, the assumption is you know how to do your job, and you know how to at least skill up so that. And I think once you layer in the concept of leadership, and, you know, driving individuals to use the tools, and then ultimately, you know, ultimately, drive them to to kind of drive results by influence, then I think that gives management that that world, but I think, I think the other thing is that that world of KPIs, and I am, I am a data fanatic. I will spreadsheet anyone to death. I love it. But often we get clouded in the narrative of the data, you know, and sometimes we get so, we get so tied up in chasing that number that we forget to actually push people through the system and ultimately make the system better. And then I think one other thing to layer on this, and chapter 13 in my book, is about psychological safety. And Dr Amy Edmondson of Harvard wrote, kind of coined this concept or phrase in 1999 and psychological safety is that ability kind of cultural within the organization, to where individuals don't have to be afraid to speak up or challenge people. And I think that bureaucracy or even the hierarchy sometimes gets in the way of people challenging the systems and saying, Hey, this is or isn't working. And most of the time, everything is linear when we think steps one through 10, but there's a lot of variables on the outside that are really driving the performance, you know, and, and I've, you know, previously, I've had some conversation with some some executives and mentioned, look, there's, there's results that are coming, and we think that the system itself is working, but there's a lot of other retooling and and kind of pivoting on the outside of that linear process that's been defined that's getting in the way. And so our managers are really managing not the linear process, but they're managing everything outside to kind of keep it in, you know, in at least a scope of understanding and relevance to achieve that respective goal.

Andrew Stotz 23:40
And in the book, you talk also about the about variation, and when we think about a system, it has many different components, and each of those components are have their own levels of variation of output. And I'd love it if you talk a little bit about your perspective on variation and how this fits in with your concept of atomic impact.

Dr. Gilbert 24:03
Yeah. So variation in my book, I use an orchestra metaphor, and I use Russ, a coffee a lot in there. And the thing about variation is, and when we talk about dimming and think about statistical process control, you know, we have our upper bound and lower bound, and if we're firing in between those two bounds, we're okay. The system is okay. But when we think about variation, there's that common cause and special cause. And the thing about variation is never, nothing is ever going to be 100% right, whether we go through a lean principle, Lean Six Sigma principle, you know, agile methodologies, whatever we think is going to drive us to that quality perspective, there's always going to be some sort of, you know, some level of variation. And so in my book, I use an orchestra metaphor, because an orchestra has a whole bunch of people firing in an orchestra itself is a system, and they're all firing at. At, you know, are playing their instruments rather at a, you know, different level, different notes, and it comes together. But you need that maestro, that kind of guides the orchestra, to actually make music. And that variation could be small levels of tone, small levels of, you know, tweaking the instrument itself to effectively achieve the results that we need, and so from a variation perspective, I think it's important to understand that common cause and special cause, because variation isn't always noise, right? Sometimes it is a signal that we do need to change. We do need to optimize. We do need to tweak the system to make it easier, make it better or actually meet the demands of our organization, or even the demands of the system itself. But that special and common cause variation is important, because if you don't understand that concept of variation, anytime you don't achieve, especially from the realm of KPIs and metrics, when you don't achieve 100% you assume someone did something wrong, or someone failed, and it's likely okay. It's within the realm of common cause variation. It's baked into the system. But we tend to take that variation and without definition of common or special cause variation. We tend to take that variation and point at the people we point at so and so didn't do X or so and so didn't, you know, produce the results or the productivity that they were supposed to have to ultimately produce 100 cars. And that variation tells us that sometimes it's going to be there. You're not always going to hit 100% but find that level that you're comfortable with. And it's just like my good guy, Bill bellow, says there's that acceptability versus desirability. Determine where you're at. And if you can find what's acceptable versus desirable and learn within that realm of variation, I think you'll you'll be okay

Andrew Stotz 26:58
with so many things go through my head. One of the things I have a story of when I worked for a particular boss who I thought was really brilliant guy, he hired some of the top analysts in the stock market, including myself on that team, and we really were all pretty intense and very good in our areas, but he never had a common aim for us, and so we never really made the impact. And then I think about some you know, think about an orchestra. You have people that have spent their whole life learning how to play one of the many instruments. So there's an obsession, there a division of labor, but a common aim. Think of one of my favorite documentaries, the last dance, yeah, with the Chicago Bulls and Michael Jordan and Scottie Pippen and all of these guys who each had an obsessive nature in a particular area, but there was a common aim. And I'm just watching a new documentary called Becoming Led Zeppelin and each of the four members had an obsession in an area, but there was a common aim. And so when I think about the division of labor, I think about somebody recently said, You sound like a workaholic. I said, Don't insult me. I am far my obsession goes far beyond that. Yeah, that sounds painful, but I spent every single waking moment of my life obsessed on a couple tiny little areas of this little world. So I just thinking about that as you were talking about the orchestra. And you know what I loved about Dr Deming was the idea of, how do we get the most out of people? You know, I want to be on that team. I want to be, you know what? What's great about watching becoming Led Zeppelin, or watching an orchestra, or watching the last dance is, you just see the whole thing is a combination of this selfish obsession in one area and bringing that together with a group of people to accomplish a common aim. What more? What more do you want in this world?

Dr. Gilbert 29:16
Yeah, and it's kind of like the concept of the willing worker, right? And I think Deming puts it best is nobody, nobody wants to go, no, like, like, and I've never experienced this. So whether I've been frustrated at work or not, I've never woken up and said, I'm going to do a bad job, right? You could be frustrated whatever, but you end up going to work, right? But you're limited by that system to produce the results that you're supposed to do. But if people understand their aim of the system, you got to know right? And that's beyond knowing what their job is and knowing how to do their job, it's what's the end result. And I think sometimes that does get lost in translation of, you know, translation of being able to. Tell people, here's your contribution, regardless of your level, but here's where we need to go and where we want to go and and if we can do that, I think you do you get results like the like the Chicago Bulls, yeah,

Andrew Stotz 30:15
I do want to get to your story of your worst investment ever. I'm going to be interested to hear that, but yeah, before we do that, so we've talked about systems. We talked about variation, and your what you've talked about in the book, there's one last topic that I think is interesting for you to talk a little bit about, which is what you call the chain reaction coefficient. And maybe you can explain a little bit to us. What is it? How do we think about it? How do we employ this thought?

Dr. Gilbert 30:44
Yeah, so the chain reaction coefficient formula is, we'll call it a mathematical formula. There's a little bit of subjectivity, because it forces you to go and find your benefits. But the formula itself is primary benefits plus secondary benefits multiplied by point seven or 70% because we're conservative, we'll say we're a little conservative on the secondary benefits aspect, because the primary benefits may be a save saving of time, or you save more money, right? And you know that that's a primary benefit when you identify your atomic actions. Those secondary benefits are those small things like a morale boost. And how do we how do we account for those? And then we add in. Then we are multiplied by network reach. And how far does what we're doing reach your team? And then we divide by your direct investment, and that direct investment pieces multiplied by 1.5 because often we know this. In the world of business, if we think we're going to invest or have to spend $100,000 we end up spending $150,000 because something didn't go the way as planned, or we can, you know, layer in inflation or something there. But once you define the primary benefits, secondary benefits, that network reach and the direct investment, you get a number. And so within my book, I have a matrix, and you're going to come up with a pretty most of the time, a small number, but anything that's greater than five, and in my book, I'd use a ratio five to one. Anything that's greater than five to one, we consider that atomic and atomic action. So you're going to say, currently, today, I have a direct investment of eight hours. I have my network reach of 12 people, and I'm taking 12 hours of time, but what's the benefit we get out of that? And then when we talk about the kind of end result, if we were to change that to kind of an asynchronous type of connection point, then we fall into the realm of we're getting the same material. We can expand this report out mechanism from an asynchronous connection point beyond the original 12 people, and we've reduced it to 10 minutes of input from, you know, from those original 12 people. And now we've saved time. And then when we talked about that time, of that direct investment, at this point, when we talked about that direct investment now our ratio was a lot smaller or a lot larger, and that impact is, we, you, we 10x we 12x the impact from those atomic actions. So the way to use it is, it forces you to go see what's in your systems, what's in your organization. That people are doing every day, and I actually mentioned this in the book, is every now and again, go and sit with your best performers. Don't ask any questions, just observe, see what they do differently, because they're likely spending time working through some sort of atomic action that's helping produce that result and makes them a lot more effective. So when we talk about the chain reaction coefficient, this matrix tells us, or at least allows and guides us. Rather, there's things that we're doing in our organizations today, and when we go back to that concept of productivity that are killing time, it's, you know, it's toxic, and most of the time for sake of doing it anyway. Sometimes we hold an hour long meeting and we report out things that could have been sent in an email or, you know, could have been a quick phone call or even a text message. And because we're killing so much time, if you use this chain reaction coefficient to determine what you're already doing in your organization, that's going to produce, you know, either the same results, or massive results, without killing time, then you're giving time back to your to your teams to then ultimately create more inputs and provide their efforts where it truly needs to be.

Andrew Stotz 34:51
Yeah. And I think in the simplest way of expressing that, we can just say if systems, if system is the majority. Already, you know the impact on the output mainly comes from modifying or improving the system. Then the question is, what activity within the system will produce the biggest output? And I believe that's really where you're getting at with this chain chain reaction coefficient concept, and I thought that was really helpful. And I think I was just thinking about one of my clients that, you know, that's actually the question I'm going to take to them next time I meet them, it's like, what is the one thing in this system that we can change and fix and improve that can have the biggest impact? Yeah, so that's a great one. And for the listeners and viewers out there, you can go to atomic impact book.com and learn more about it. He's also got Gilbert's giving you a chance. You can buy the book there. You can also get the first chapter there, so you can learn a little bit more about it, but definitely fascinating, and it's interesting to learn about it from you. Is there any last thing you want to share about the book before we move into your worst investment ever?

Dr. Gilbert 36:11
No, nothing else. I think, you know, it's excited to kind of verbally share it. You know, I've had some small conversations with everybody, but, you know, go, definitely go and get a copy of the book. I think, I think you'll enjoy it, especially the kind of, I wouldn't say they're quirky references to physics, but at least, kind of take your mindset away from business itself, and then think about these same type of behaviors that we could apply to our organizations today. Existed in a completely different domain, a completely different field, and we created nuclear energy from it. So with that, that's all I have.

Andrew Stotz 36:45
Well, now it's time to show your worst investment ever. And since no one goes into their worst investment thinking it will be, tell us a little bit about the story leading up to it, yeah, and then tell us what was your worst investment.

Dr. Gilbert 36:56
Yeah. So my worst investment is going to be very interesting, because it's not necessarily the financial investment, it's time, and most of the time, I think from a business perspective, and I'm a rusher, I'm a very impatient person, but when it's come to an investment and an idea that I have, I gave too much time to really a couple ideas, but I'll give you the example of one is I had an idea for a portable charging device that would be dispensed by way of a vending machine, and my mind went to red box. You know, this was roughly 1213, years ago, my mind went to red boxes. You go and get a DVD, you can take it out, watch it, and you put it right back in. And my mind went to, how do I, how do I build something like that and put, you know, from a business perspective, I can take a portable charger and you return it, it plugs it in and recharges it, and it sells, sells right back to another person. And you know, you reuse an inventory, and that investment of time of waiting, I'd lost out, because if any of you travel today, there's a kiosk like machine in airports. And my whole business plan was airports, universities, movie theaters, places where individuals needed a lot of their phone, right? They needed to use their phone frequently, and we know that everyone's phone dies and in an airport, and so that convenience of creating something like this was my idea. But the company fuel rod came out, and they actually did it, and I by waiting and investing that waiting period I missed out. Doesn't mean I can't still kind of venture into the market, right? But they will have, and do have first mover advantage, and it's the same concept. There's not much of a differentiation you can provide to that respective market. But I'd say that was my worst investment ever. And,

Andrew Stotz 38:54
and how would you summarize the lesson that you learned from that

Dr. Gilbert 38:59
you got to dive in? And I think, I think, you know, even with your opening you got to take risk, but at some point you got to minimize risk. And, you know, and I that's what I did with starting intro q Ai is, as I buckled down, hunkered down, buckled up, and dove in and said, I'm going to take this risk and get going, especially in the world of AI, you know, creating an AI SaaS product. It moves quick, right? I think we're into the world of agentic AI and generative AI is still relevant, but that's not the topic these days. And so what I learned from that was you can't be afraid and trying to growing to being a business executive, you learn that you can't be a risk averse leader. Sometimes you have to take risk. And growing up, my entire life, I've always been risk averse. It's, I don't want to jump from here to there, you know, I don't want to go swimming in a lake where I know there's, you know, venomous snakes and stuff. I don't really want to do that. And so that held on to me, and I think that was that kind. Of investment, of waiting and being risk averse, really taught me that, look, you're holding yourself back, right? You're holding yourself back. So I learned to jump in, do what you need to do, stay up late, work hard, do the research that you need to do, and get things going, and then ultimately everything will come to fruition.

Andrew Stotz 40:19
Yeah, yeah. And I would you know that it's a great story, and I one of the lessons I've learned over the years. And I think the book, The Lean Startup, is a great one that helps us understand the concept of a minimum viable product, and when, when we the biggest mistake that people make in starting up is not bringing your product to market. And as Reid Hoffman said, if you're not embarrassed by the first version of your product, you've started too late. And so I recently developed a new service called the profit Boot Camp, where I help mid size family businesses double profits in 12 months, guaranteed or 100% of their money back. And I developed this system originally by testing it out with my own business. So I tested out with my coffee business and managed to double the profits, and then I tested it out with another private business that I managed to get as a client, and what I saw was that I needed to improve a lot of things. I was able to achieve the goal, but there was a lot of improvements. So I spent about six months improving on that, and today I'm should be signing with my third client with that, and now I can see how I can really I've improved every part of it, and now it's ready to scale. And so the idea of testing your idea with the market is such a critical component of this idea of diving in too, you know? So,

Dr. Gilbert 41:44
yeah, yeah.

Andrew Stotz 41:47
So based on what you learned from that story and what you continue to learn in your life, let's imagine a young man or woman you know, who's excited about an idea like you had there, and what would be one action that you'd recommend for them to take to avoid suffering that same fate.

Dr. Gilbert 42:08
I would have to say, don't be afraid to fail. I can tell you with intra q Ai itself. And I know that's kind of a cliche answer, but I can, I can tell you with intro Q, AI, I started in one kind of realm and path, and learned that that path was already crowded, and I decided to do further research to find how do I not have to change my MVP, and how can I keep the course structure and go beyond what, what this already crowded market is doing. So don't be afraid to fail and even iterate, you know. And once I think to your point, Andrew is getting things to market and finding out. Does this make sense, and is it relevant? Because often we do get scared of the big names, the big guys, the Googles of the world, and we think that they would otherwise crush you. But you know, there's you don't have to be horizontal. You can go vertical. You can find a niche and spend your time there. So if you have to iterate, and maybe you don't call those iterations failures, but if you can apply the at least the focus to know that you will have to iterate and likely call it a fail at some point. Don't be afraid of it. Don't be afraid of it, but maintain the course, and I think you'll be able to see it

Andrew Stotz 43:30
through. One of the things that I when I hear people complain about capitalism, and they say, Oh, this, there's so many rich people, and they're so mega rich, like, you know, you know, Jeff Bezos as an example, I said, you're looking at the wrong end of capitalism. You're looking at a very small number that made it to the success. But where capitalism's true power happens is the millions of people who go out of business every single year because they can't bring value to the market. They're pivoting, they're iterating, they're trying everything, and they can't make it. It could be their product doesn't bring value to the market. It could be they run out of resources. It could be they don't have the skills. It could be they got ripped off. It could be they hired the wrong people. No matter what it is, the market is brutal, and if that's the reason why bringing our products and services to the market as fast as possible, to see, you know how we can pivot to bring that value, that is the the crushing brutality of capitalism, yet, what makes it so great for society?

Dr. Gilbert 44:50
Yeah, definitely a paradox.

Andrew Stotz 44:51
Sorry, just got up on my soapbox there. That's

Dr. Gilbert 44:55
okay. That's okay. Okay. I love it. Yeah.

Andrew Stotz 44:57
So let's talk about resources. What's a resource, either of yours, or any other resource that you'd recommend for our listeners?

Dr. Gilbert 45:06
Yeah, so I would, I would definitely say my book, you can definitely use that as a resource. And even on my website, I have, you know, a few resources that come supplemental on my website. But to go beyond that, I really think Demings out of the crisis. I think Demings out of the crisis, because if you can figure out how to apply systems thinking to your life, to your work life, even you know personal or work life, and if you can find a way to apply systems thinking to those areas. It'll change the entire way you view life, society, work, and you'll start becoming a little more solution oriented. Because I think the relevance of the crisis being written, you know, over 3030, plus years ago, makes it very relevant today, but it's missed, right? It's often missed because people are trying to move a lot faster than what we'll call the old times, but it's relevant. There

Andrew Stotz 46:15
is a legend. Look at this one. That's what's crazy. Is look at

Dr. Gilbert 46:20
his. Did he sign that for you? Yep, yep, oh, man,

Andrew Stotz 46:24
1990 so he was 90 years old at that time, but amazing experience of my lifetime.

Dr. Gilbert 46:30
I was, I was born, I would so that was October 2. I was shoot six months old.

Andrew Stotz 46:41
Yeah, and I was just 24 in amazing experience. All right, last question, what is your number one goal for the next 12 months?

Dr. Gilbert 46:52
So I'd say my number one goal for the 12 months, or at least in the next 12 months, is to really get atomic impact, to take off and, you know, and kind of a parallel universe, the same with entry q Ai. I think between both of these, it had me focused and stay, stay true to course. And, you know, I'm a lifetime learner, so it'll give me something to be busy, especially anyone who goes through a doctoral program. You learn that after you're done and you're like, what are key? What do I do? I have time and so, but in the next 12 months, I think launching those two to the moon will definitely be my goal. And you know, it's going to be being able to speak with individuals like you, you know, be able to reach your audience, and then even beyond, you know, my goal is, minimally, to take atomic impact and intro q Ai, but specifically atomic impact, and create speaking engagements and workshops to kind of reinvigorate, not only dimming, but even the concepts that I've kind of developed within atomic impact, to just change the way we work, to change the way we work

Andrew Stotz 47:59
Great Well, ladies and gentlemen, you can say that you heard it first here as as Dr Guzman becomes more and more famous and successful in what he started, you're going to hear it on other podcasts, and you're going to hear it all over. So get the book. Learn more about it, see how you can apply atomic impact into your life. 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. And as we conclude, Gilbert, I want to thank you again for joining this mission. And on behalf of AES dots 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?

Dr. Gilbert 48:43
Nothing. Go, go split some atoms. You know, I appreciate you having me on Andrew, it's been a pleasure. And, you know, look forward to the future. Well,

Andrew Stotz 48:52
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 will see you on the upside. You.

Andrew Stotz 00:02
Andrew, fellow risk takers, this is your worst podcast host Andrew Stotz from a Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was head of Research at buckinghamwalt partners. You can learn more about his story in Episode 645, now, Larry stands out because he bridges both the academic research world and practical investing. And today, we are wrapping up our series on the book, enrich your future, the keys to successful investing. And specifically we're going to talk about how to put some of this in action, how to think about some frameworks. Are you a conservative? Are you aggressive? What types of frameworks you should be looking at, as well as talking about some instruments. Now, none of what we're going to talk about today is investment advice. It's basically for educational purposes to start thinking about these types of things. So I just want you to use this as a foundational way of kind of thinking about the way you're investing. So Larry, take it away.

Larry Swedroe 01:05
So one of the things that investors have to decide is, do they want to invest in a total market fund, which is a perfectly good weight certainly could be a starting point for discussion, because anything that deviates for that says, To at least some degree, maybe I'm smarter than the market, and I can choose which assets are better. That's one way to think about it, and it's a very low cost, very tax efficient way to do it, however.

Andrew Stotz 01:40
And just to talk about that briefly, when you say total market. Now normally, when we're talking in America, a lot of times when we're talking total market, we're talking about the total US market. So there's total market, as in the total US market, and then there's total global market. Maybe we could just talk briefly about those two steps, because let's just say you absolutely don't have any time, you don't have any knowledge, you don't have any interests, you know, all the stuff that we talk about not that interesting. And therefore, you just need the simplest way. Would it be total US market, total global market. How would you think about those

Larry Swedroe 02:14
two I believe that the right way to think about these things is to start with core principles of investing, and I think that there is just a small handful of them. That's the good news. And the first is you should believe, because the academic evidence, as we have discussed, is overwhelming, that the markets, while not perfectly efficient, they're highly efficient, which means it's very, very difficult to outperform on a risk adjusted basis. Okay, it doesn't mean that there aren't inefficiencies. It doesn't mean that some investors won't outperform. It just means that the odds of your identifying those investors or doing it yourself are so poor you shouldn't try. So if you believe that markets are efficient, then the right way to think about that is the market's price is the best estimate we have of the right price, okay? And that means also, if markets are efficient, that all risk assets right should have similar risk adjusted returns, okay, so one, if markets are efficient, we don't want to engage in individual security selection or market timing, okay? And it means that US stocks have to have the same expected return as Thailand stocks or or emerging markets in general, or

Andrew Stotz 03:55
the same risk adjusted return. Risk adjusted Okay, yep. So

Larry Swedroe 03:59
for example, let's keep it simple. We know that junk bonds should have higher returns than AAA rated corporate bonds. That doesn't make them better investments. It makes them higher expected return, because risk and return should be related once you adjust for risk, and that could be the duration risk or credit risk we talk about bonds, then they should be similar. So let's take an example. If Thai stocks, right, had lower expected returns, as many people think, than US stocks, and if markets are efficient, what would happen? People would sell Thai stocks, driving their valuations down doesn't change the earnings of the Thai companies, so it drives their expected return up, and money would then be flowing into US stocks because they think they. Their higher risk adjusted returns and driving us valuations up, which means expected returns are now lower because you didn't change the earnings until we're in an equilibrium,

Andrew Stotz 05:12
which is exactly what's happened the time Thai stock market has devalued de rated over the last, let's say, five years till we're getting very close to book value. Let's say we're at one to 1.5 times price to book. I was just looking at a company. I went to visit a company yesterday, and they're trading at 0.8 times price to book, whereas you see the US is at four and a half five times price to book for the overall market. So that exact thing you're saying is what's happened, just looking at Thailand versus us,

Larry Swedroe 05:43
should happen over time. Now that doesn't mean the market's always right. Obviously, for the last 1617, years, US stocks have outperformed international stocks, but that's now reversing, and there's no evidence that we know of that people can time flows between stocks. So number one is all risk assets. One, the market is efficient. Number two, all risk assets should have similar risk adjusted returns. So you want to avoid active management, etc, but invest in the assets based upon your ability, willingness and need to take risk. If you're willing to take more risk and have the ability and maybe the need to well, then you can load up on more risky, high expected returning assets. It doesn't mean that they're better assets and means that they have higher expected returns, but not when you adjust for risk. Are they any better? Okay? And then the last thing is, if all risk assets have similar risk, adjust the returns. This makes no sense to concentrate all of your risk in one basket, whether it's US stocks or Thai stocks, if you're live in Thailand and you have a home country bias, or even equities in general, and we've talked about maybe investing in other assets, not just international assets from equities, but Things possibly like reinsurance, infrastructure, funds, private credit, things like that, where you have low ex low correlation to assets. Okay, so, so let's get to your question about us versus International, emerging market. I think the only right way to think about this, at least as a starting point should be. Again, markets are efficient. Today, the US is maybe 65% of the global market cap, so therefore that's a good starting point. And then of the remaining piece, there's a ratio of about three to one between developed and emerging so if you had 35% maybe it's 27 and eight, or something like that, between developed and emerging markets, and you could just buy Vanguard, has a total global market fund where you could buy a total US and a total International and then if you decide that you have either the ability, willingness or need to take risk, or if you decide you're smarter than everybody else, and you think you know us, assets are now way too highly valued, I might use the word sin a Little and not own 65% us. Maybe I'll own 60 or 50, but I wouldn't own 10, right? I don't want to get too far away from the global market cap, because I don't think I'm much smarter than anyone else. It's interesting to point out, by the way, in 1989 Japan was something like 60% of global assets, and it was in a bubble, clearly in hindsight, and now the US is way up there, a much bigger percentage than its share of the world economy, and that's because us valuations have gone way up. So if somebody asked me today, what would your preference be? My own answer is, I'm 50% us and 50% because I think US assets may be, in general, too highly valued in the way Japanese stocks work, too highly

Andrew Stotz 09:36
valued. So 50% us, 50% non US.

Larry Swedroe 09:39
But notice I'm not that different from the rest of

Andrew Stotz 09:43
the world, right? So the rest of the world, right now, if we looked at the VT fund by Vanguard, which owns, let's say, about 10,000 stocks, and there's other ones, whether that's fidelity or Schwab or dimensional or others that have these types of other. Passive funds. But let's just take Vanguard for an example. They've got about 10,000 stocks, and their exposure to the US is about 60 to 65%

Larry Swedroe 10:10
right about the world cap, free float some you know, that's the way, typically, most fund managers do it, not the app, but what's called free float money, you know, shares that are available to be trading.

Andrew Stotz 10:24
Yeah. Okay, so now let's just stay on this topic. So right now, I want to look at kind of three types of people. Let's say someone in their 20s, and let's just say they're a typical person in their 20s. They're they're earning some good money, and there's there's they're spending, they're saving, but you know, they got many years ahead. And then you got someone in their 40s, and let's say that there's 20s and 40s. People want to retire when they're 60, let's say and then you've got someone in their 60s, right? So we've got three different general age groups, and we can say risk profiles, if we consider that they're like the average 20 year old, the average 40 year old and the average 60 year old. Should the, let's just take the global market exposure. Should these people only have global market exposure? Or should they say, I want global market equity exposure, and I should have some sort of fixed income or bond exposure?

Larry Swedroe 11:21
Yeah, so number one, one of the worst mistakes that you'll often see even professional advisers make, which anyone who's read my books on financial planning and retirement knows they they're making the mistake of only looking at one factor, and it's only a part of one factor, which I call the ability to take risk. The ability to take risk depends upon two things. One, your investment horizon. Obviously, if you're 65 or 75 you have a shorter horizon than a 25 year old, so you have less ability to take risk and wait out a bear market, and especially if you're retired, you have less ability to take risk because you're subject to this sequence risk that you can't recover from because you've withdrawn the money.

Andrew Stotz 12:17
And just, just to, just to clarify this, I think when you say the ability to take risk, I think what you really mean is the ability to bear

Larry Swedroe 12:24
risk. To bear risk. Well, the same, you know, same exact thing. Yeah. Okay, so that's number one. But there's a second thing that so many people totally ignore, never even ask. So I'll just ask you, Andrew, to give you a chance to show your audience how smart you are. So you've got two groups of investors, okay, and they're both the same age, okay? And everything about them is equal except their job, okay? So you got a group of investors that are auto mechanics, construction workers and stock brokers, and you got another group that are doctors, 10 years professors at university and government employees not subject to those so which group has more ability to take risk? So,

Andrew Stotz 13:25
but first idea that I had was that the first group seems like they're really exposed to the economic cycles, versus the second group is less exposed to economic cycles. Goes up and down, but doctors are going to get paid, yes. So the result of that is that, first of all, when the economy goes bad, a mechanic or that type of person in that type of job that you've described in the first group is going to be terrified that they're going to lose their job, their income could go down. They could lose their job. They have to switch, get a lower job. And so from that perspective, I would say that they've got some real serious exposure to the economic cycle, and therefore less ability to bear risk.

Larry Swedroe 14:03
That's exactly right. And not only that, it could get much worse for them, because the markets crash and they get laid off, and they have to sell stocks to put food on the table, and then eventually, when the markets recover, they can't, because that money has been spent. So that's one part of the equation that you must consider, but that's only one of a three legged stool, and like any stool, all three legs have to be firmly planted, or you could tip over. So we have the ability to take risk. Second thing is what I call the willingness to take risk, or the stomach acid or sleep well, test right? So some people, if the markets crash, can't sleep and life's too short not to enjoy it, and they're going to worry. So. They shouldn't take a lot of equity risk, and some people just will panic and sell, right? So in the first group, they don't panic and sell, but they worry so much they can't enjoy their life. That group should clearly be taking less equity risk, and the other group, and then you have this need to take risk. And so what I talk to people about is something called the utility of wealth curve. So when you're don't have a lot of money, let's say you're homeless and someone gives you $20 I mean, that's enough for maybe get a shower and, you know, a meal at a, you know, and stuff. And that's makes a huge difference in your life. If you have $10 million and there's a $20 bill on the floor, you might not even stop down to pick it up, because it's not going to change your life in any meaningful way. So what the academic research shows is, once you have a sufficient income, assuming you have your health food on the enough money to put food on the table, you're not worried about paying the rent, those kinds of things you're there is no difference in happiness between people who have more or less this done all these studies on places like Easter Island and New York City and, you know, jungles in Africa and Peru being, you know, the small towns and stuff. And they find this is true, that the utility of wealth curve goes like this. More money early can mean a lot, but once you have a lot, then more money, of course, is better than less, but the incremental value becomes much less. So in the US, a study was done about a decade ago, and it found that that level of happiness where it didn't matter, was about 75,000 So today, let's call it 90,000 now, maybe in New York City, it's 200,000 and in Hope, Arkansas at 60. But there's a level. And if once you have enough, right, it's, you know, yeah, it's nicer to play golf around the golf at Pebble Beach than it is maybe a local, municipal golf course, but you still got a beautiful walk in the sun. Maybe you're playing around the golf with your best friends or your wife. You can have a beautiful day and enjoy it. Pebble Beach is nicer, but it really doesn't change the quality of your life very much. To me, I get the greatest joy of walking around the local park here, around a beautiful lake with my wife reading books or playing a game of Monopoly deal with my grandkids like I did this afternoon. That doesn't cost anything, right? And so what I try to teach wealthy people is, once you have enough, and let's say, in the US fairly wealthy. If you can't be happy on, say, 200,000 a year, something is wrong. Okay, well, you know, if you use a 4% withdrawal rate, multiply then by 25 200,000 5 million, why are you sitting with 50, 6070, 80% equities? It doesn't make a lot of sense, okay, so at least as one starting point is I don't need to take risk. And when I tell people, once you're at that level, I can't see a need to own more than 20 or 30% equities. That greatly reduces your tail risk. And you know, if you miss out on a bull market, who cares? You're going to be happy anyway.

Andrew Stotz 18:46
Okay, so let's tie that into the question I asked you, which was your 20s, 40s, 60s. We now you've talked about three factors to consider, the ability to bear risk, the willingness to bear risk, and the need to bear risk or take risk and now we've got a good understanding of that.

Larry Swedroe 19:04
Let me say this. Add this before you ask your question, because all three legs have to be stable. In general, the answer should be whichever is the lowest number. So if you have a big willingness to take risk and a big ability, but no need, I recommend that that should dominate your answer, okay, but there are mitigating circumstances. I think we may have talked about this in a prior podcast, but I had a friend named Philip was a senior executive, top marketing guy at a company I worked at, and he was the epitome of somebody who couldn't stand risk. I mean, he'd go crazy if the market dropped a few percent, which of course, it could do often on a daily basis throughout a month or a year. It. But he was about at the time, about 45 and he hated working in the pressurized world of corporate Corporation. He wanted to quit and become a photographer, and that was his passion. So I said to Philip, and I wrote this story up in the book, okay? And this was in the early 90s. I said to him, Oh, yeah. I said to him, here's your choice. You can have a low equity allocation, sleep well, and you'll have to stay as an executive in this world, and, but you'll make a lot of money and but you're going to have to work another 20 years to get to your number. Or you could take a lot of equity risk, buy a 20 year supply of Maalox and hope we get a bull market, and then maybe you can de risk later and then quit and whatever. Well, this was early 90s, and the next several years, of course, we had spectacular returns, and he benefited from that, because he made the decision that his life priority was more important and he was going to live with the risk. And he then retired and became a photographer. So sometimes you have to, there's not a free lunch there, but if you have a choice, it's the lowest number that should dominate.

Andrew Stotz 21:31
Okay, so let's go then to the person who's in their 60s, and say they, they do. They don't need to have 100% exposure. Let's say to global equity market is the way that they're going to reduce that exposure through fixed income. The primary way of doing that,

Larry Swedroe 21:52
I would say, No, I would say that again, it comes down to diversifying in a world where all risk assets have similar risk adjusted returns, and here it somewhat depends in the US. We're lucky. We are in the last really, only about the last five, maybe 10 years have seen alternative assets come to market with much lower fees than they used to do you wanted to invest in reassurance or private equity or private credit or private real estate, you were typically paying at least 2% annual fees and 20% carry or share of the profits. Today, those numbers that come way down. So 10 years ago, I didn't own any of these alternatives, and now my portfolio is half because I believe in diversifying those assets, of course, as many as I can. So it may depend upon what you have available to you. And since that book was written, there have now been a few others added to the portfolio. I recently made an investment, for example, in an infrastructure fund run by Hamilton lane, which is a huge company advises on something like a trillion dollars of pension plan assets and infrastructure in this fund happens to be what's called the tender offer fund. Their fees are only 1.4% now that's not cheap relative to index funds, but it's a far call from two and 20 and the expected returns today are in the 10 to 12% range, and the volatility is low single digits, so much lower than equities, and there's very little inflation risk, because they typically have long term contracts that things like dams and roads and utilities or Amazon's got a facility that there's a 15 year contract and it's got escalator clauses with triple net leases. So I now own things like a reinsurance fund. I don't have to pay two and 22 for private credit. I'm paying much less than two and 20 something like effectively about 115 so I'm now able to capture that. So it depends on what's available to you. I think we're much luckier in the US than the investors overseas are, where fees are much higher.

Andrew Stotz 24:39
Yeah, that's for sure, and so it's what you're saying. And I just want to try to get this as simple as possible. Is what you're saying is that fixed income should not be the primary way to reduce risk. It

Larry Swedroe 24:53
depends upon what assets you have as alternatives if you have access to go. The relatively lower cost alternatives, I think the typical investor should have an absolute minimum of 15 to 20% alternatives. Then you might have 30 or 40% inequities, not too much, and then the rest, and you could have in, say, fixed income, if you're a little more aggressive and willing to put in the time to get educated, you might have more like 1/3 in equities, 1/3 and also 1/3 in safe bonds. And if you're more like me, you can look more like the Yale's of the world. And maybe you only have 20% in equities, maybe 50% in or 20 to 30% equities, 50% in these alternatives, and then the remainder, and say, fixed income. Now I think you should never own less than 20% equities, because there are periods when stocks or when do well and bonds do poorly, and so you want to have at least that 20 to 30% but make sure you're globally diversified and use low cost vehicles, okay? And so it's just going to depend on your willingness to deal with a lot of the psychological issues, which we've talked about often, this tracking variance and recency bias, which are the fatal enemies of most investors.

Andrew Stotz 26:27
And when we think about first of all, for international investors, a lot of times, these private these alternative investments, end up being funds that they can't necessarily access as easily as they can ETFs. So that's the reason why, for some people, even though there's lots of different credit private credit instruments available, they are generally funds and harder for, let's say, an international person to buy. And hopefully that will change, but we'll see more of that in ETFs, and I know there are ETFs on them, and so now, basically, one of the questions that I have then, okay, so it always makes me think when I think about asset classes, because in the end, equity is exposure to Companies and fixed income, unless it's government fixed income is exposure to those same companies, but with a different mechanism, a different risk structure, and the like and private credit is maybe exposure to companies, but maybe companies that you wouldn't necessarily get access to, that are smaller or that type of thing. So although it's still exposure to companies, it's, you know, different, and that's different from something like a commodity as an example, that's not necessarily tied to a company. So I want you to help us think about asset class, and just to add in a little more complication, some people will, let's say all the I'm exposed to all these asset classes because I have small cap, I have large cap, I have high quality, I have low quality, I have all of these different stocks. But to me, they're really explaining maybe exposure to factors. They're not explaining exposure to asset class. So how should we think about asset classes?

Larry Swedroe 28:19
Well, so what you want to think about is what types of risks you're exposed to. Forget even the words factors or asset classes. What are the risks? Okay, that you're exposed and what you want to do is diversify across unique sources of risk. So for example, all equities are exposed to economic cycle risk, so they have a market beta, typically on average of one. So you look like the risk of the market. So the market goes up 10% you'd expect to go up 10. If the market goes down 10, you'd expect to lose 10. Now, there are certain stocks that we call high quality, defensive stocks. You might think of them as supermarkets and drugstore chains. You know, high quality companies that have low financial leverage, very stable earnings, they might have a beta of something like point seven or point eight. So much less economic cycle risk. Okay, so when markets are up 10% you might only be up eight because you don't participate as much. But when markets are down 10% you may only be down eight on average. Okay, so these stocks have clearly some unique risk to them, okay? And this happens to be called the quality or profitability factor. We know small cap companies look different than large cap companies. They tend to both. Depends on the. See, you're in to some degree, and your finances be have higher betas than the market. So market goes up 10% small cap stocks may go up 11 and the reverse is true in the downside, just specifically in private credit. We could spend an hour alone on that subject, but credit is has a broad spectrum of risk in it. You could be US government, which has no credit risk, for at least US investors, you have AAA companies which almost have no default risk. I think there's only been one AAA company that's ever defaulted Penn Central Railroad. So it's non zero, but very low. And then you have double A, single a, double B, you know, etcetera, all the way down to high yield bonds. And I yield bonds have much more risk in 2008 when government bonds went up in value, and Triple A bonds also did well. High yield bonds lost 50 or 60% because of their exposure to that and private credit covers that whole spectrum. Could be highly risky, or is a fund that I invest in and run by a firm called Cliff water that only invest in private credit that is senior to all other debt. It is secured by assets, not, you know, paper promises, and it's backed by private equity. So if the private equity firm thinks that the lenders will take over the company and declare a default. They'll get wiped out, or could get wiped out, and so they are more likely to step in. They're not going to throw good money after bad. But the evidence is, if there's a chance and they think they can salvage it, they will and this and the average loan to value is currently about 40% so the historical default losses on this type of loan is 0.25% so I also invest in a little more sophisticated product. It's called the double B tranche of a pro of a clo or collateralized loan, and its yield as the private credit fund I'm in has cranked out about 10 or 11% for the last several years, okay, with very low volatility. Okay, this double B fund is at even higher returns, and in the 20 year history of double BS, there's virtually never been a default loss. But most people aren't aware. They don't it's esoteric, but And very few people play in it. Fact, there's only one fun that even focuses only on that. So there is a big spread available, because there's no supply to that marketplace. So there's a very wide spectrum, and you have to do your homework or work with an advisor who has access to these products and has done their homework. And I would recommend, as we discussed in our last session, ask to see their financial statement if they're invested in those funds they're recommending, and if not, been run, so you really have to do your homework here, or have somebody you can fully trust because they're a fiduciary, puts the money where their mouth is, invests in the same way they're recommending, and is willing to educate you about all of the risks of these investments. So

Andrew Stotz 34:00
for the next thing I'm going to I'm going to preface the next question with a couple little stories. You know. The first story is, if a tree falls in the woods, you know, and we didn't hear it, did it actually fall another in another concept related to this is the tin can portfolio. Some people say, Oh, my uncle just put, you know, his family bought stocks, and they put the shares in a, you know, in a drawer. And 30 years later, he won't, you know, he found them. And he's a multi billionaire, right? Because he didn't look at prices and all that. And Warren Buffett, you know, goes on about that as an example. And then my third thing I would look at is a bank. Now, banks generally trade close to book value. They trade at a premium to book value most of the time, but it's pretty close, and that's because banks are marking their portfolios to market on a pretty regular basis, where they're making an estimate of. Of potential losses, and then setting aside a provision, and that is trying to get somewhat close to market price, and that's why banks tend to not trade it four or five times price to book. Now, when we look at and so therefore, when you buy a bank, you're buying a portfolio of lending. Ultimately, if it's a typical bank, a portfolio of lending that's not priced as daily, let's say, as the market price for assets. But when you look at private credit, to what extent are we just buying things that are not priced often, and we're still exposed to underlying risk, but because we don't see those risk changes, we don't, we don't recognize that in the same way and which, which could be good. I'm not saying it's bad, but I just want to understand this concept of, you know, pricing versus, you know, other risks. Well, just

Larry Swedroe 35:58
one comment for you. I like that story, of course, the guy who found shares of IBM or whatever, okay, but you never hear the story of the guy who looked and found the shares of Polaroid or Enron, right? So that's true. One comment also, banks, on average, may trade around book, but they all they also run other businesses that are growing Asset Management and stuff that you know that is not, you know, an asset per se, it's services provided trust companies and other things. And JP Morgan, for example, I think trades well over two times book today, and there are other banks that trade below book because they're not growing well, and maybe their assets are worried about overvalued. What we do know in general about these illiquid assets is the following. There are plenty of academic papers on this. So private equity as well known to have a lag in their valuations and a fair degree of freedom on how they mark and that leads to stale pricing. And the stale pricing, on average, tends to run between three and six months, depending upon the firm. So that's going to make volatility look a lot lower, because if things go up and down and you know, Mark, you're marking it maybe in the middle of both times, right? So that's a real problem. And however, the private equity fund that I invest in run by Cliff water, the symbol happens to be CPE FX. They actually do where they can a daily mark, and they do that by putting a beta adjustment factor to their portfolio. And let's just, I'm going to make this up. I don't know exactly what it is, but let's say it's point three. So if the market goes up 1% they'll only mark it up one you know, point 3% they also mark daily any new information they get from the hundreds of investments they have. So they invest across, let's say, 300 different investments across maybe 20 private equity providers. So they're partnering with these firms. And each one of them, maybe one of them, does their quarterly marks in January, April, July, etc, and the others do it in February and on, and the other ones doing them on. And they're getting these coming in every month. They're getting some and whatever they get that month, they're marking it immediately, not waiting, so you have much less of a lag there. But you're still going to get a lad on their private credit fund. They're marking it daily with a, again, a beta adjustment to what's happening in the public markets. And there you have a much better read, because you have no duration risk here, because it's all floating rate credit and private credit, almost all of it, and everything this fund does is so you don't have to worry about that not being marked properly. And a recent paper I got a hold of looked at that and found, because of these adjustments, the lag was only about a month. So where private equity may show volatility because of this phony counting, if you will, of only 10 or 12, it's going to be more like 15 or 20, more like equities. But private credit, instead of being two, might be four, and still way below, because. Plus, again, at least the private credit that I'm talking about, senior secured backed by private equity. Low LTV, strong covenants has an incredibly low default rate, and its lag is no more than a month. So again, you really have to do your due diligence, understand the fund, what they're accounting, how they're marking, etc, and that's one of the risks of investing in this space. It's not for amateurs,

Andrew Stotz 40:35
right? Just I just have a file where I keep the price to book of companies and SEC by sector. And just you know, there's two sectors. One is called financials, which is a more all encompassing, versus banks, which is what I was talking about. And banks trading at about 1.3 times price to book globally. And if we look at us right now, the price to book of banks is about, let's say about 1.5 so a little bit better. And JP Morgan's at about 2.5 as you said, you know they're the best. So you know, the best in the industry gets the highest amount.

Larry Swedroe 41:18
We have a lot of earnings coming from services, not assets, correct, Wealth Management, etc,

Andrew Stotz 41:26
yeah, and banks in emerging markets are much more pure lenders, because there's just less of that service industry, you know, income. Okay, so, so the question then becomes, let's go back to a person in their 20s versus a person in their 60s. One of the questions that I have for you is, if you're in your 20s and you've got a good you've got the ability to bear risk, you've got the willingness and you've got you got some need, like, you know you do want to build wealth, is there any point in owning these instruments besides equity,

Larry Swedroe 42:05
yeah, exactly, for example. Today, I'm not saying this is long term, but the expected return to the reinsurance vehicle I invest in is about 20% and the volatility compared to stocks is about half or 60% and it's totally uncorrelated risk, because bear markets don't cause earthquakes or hurricanes and vice versa. So it's the perfect asset. Why people don't own more? I have no clue. It may be because they're scared of climate change, and I tell people, Gene the scientists are Warren Buffett's, you know, general reinsurance. They never heard of climate change, and they haven't built their best estimates. And now could turn out that the risks are greater than they think, but also could turn out to be they're less than they actually think. And the last two years, this fund has returned 92% cumulative. And it's up again this year despite the largest fire in California history, with the largest loss ever done. Okay, so there I you know, if you look at private credit 10 to 10, 11% for the least risky part of that. Well, what's the expected return to us? Stocks today, Vanguard, JP, Morgan, all saying six to seven, and the volatility is four to five times that, at least that of high quality private credit.

Andrew Stotz 43:40
Okay, so for the 20 year old, there's, there's, there's other options. You need access to these vehicles at the appropriate cost. That's

Larry Swedroe 43:50
the problem for foreign investors,

Andrew Stotz 43:53
yeah, but for the 20 year old in the US, basically, what you're saying is that look beyond equity,

Larry Swedroe 43:58
yep. Okay, I don't care if your need to take risk is high and your ability to take risk is high and your need to take risk is high, you should still diversify, because equities can get killed for the next especially us, equities could turn out to be another lost decade as the 30s were as basically 66 to 82 was and the 2000 decade, those were lost decades you got no real return. Basically,

Andrew Stotz 44:34
okay, so one thing that I think people find hard to understand, and I think it was either Yogi Berra or Albert Einstein. Both of them are very smart. He said, in theory, there's no difference between theory and practice. In practice, there is

Larry Swedroe 44:53
yes, but partly because of human behavior. So if you're going to be subject to re. Decency, bias or tracking error, regret you shouldn't own anything but the s and p5 100 or a US total market fund, because there will be periods. I'll give two examples. Reinsurance fund that I just told you made 92% the last two year, calendar years from 17 through 19, I think it lost about 35% and people said, Ah, you know, going on it? I point out that US stocks have gone down a lot more than 35% in any year you they've gone down as much as 90% in the Great Depression. They went down more than that in a weight, right? They went down more than that, or about that much or more than that, actually, in 2000 Oh, two that's a reason to diversify, not have all your rights and what, but not avoid an asset class.

Andrew Stotz 45:58
The question then becomes, it's hard for people to understand the statement that you made, which is that you know that we should have equal risk adjusted return in a, in a in a efficient market, and we have an efficient market. We've talked about that many times. So if let's just take for a moment, that theory was always in practice, and share prices and prices of assets are adjusting constantly, perfectly for their risk level. Does that mean that any asset will do?

Larry Swedroe 46:36
No, we talked about this before, right? That just means, for example, the US expected return. Okay, you could one way to do it is to look at the Cape 10 or the sickly adjusted chiller, and it's close to 40. I'll just round it to 40. And if you invert that to get an earnings yield, you get two and a half percent. If you look at expected inflation, maybe, let's say it's two and a half percent. Look at the Philadelphia Federal Reserve estimate. They publish a quarterly that's like 60 top economists at the leading banks in the country. That gives you a pretty good collective wisdom of the market, so that together is five. Now, does that mean we're going to get five? Of course not. That means there's a 50% chance we think it'll be more than five, and a 50% chance it'll be less than five, and maybe if returns are normally distributed, you might say there's a 40% chance you'll get more than six, and a 40% chance you'll get less than three, and there's a 20% chance you'll get more than eight, and a 20% chance you'll get less than zero, and a 10% chance you'll get more than 10 and a 10% chance, you'll lose 10% a year like, I mean, Japan for 36 years has had a nominal return of less than, I think it's around one and a half percent for the last 36 years. That's nominal. So real returns are probably about zero. Nobody knew that in 1999 right? Well, you have that's why

Andrew Stotz 48:29
hold on for just a second there, because we're, let's say we're in somewhat of a situation now in the US, particularly in a group of stocks, where valuations are very high. And people did know that the Japanese valuations were extremely high. Everybody felt it. Everybody saw it. They enjoyed it for the 10 years prior,

Larry Swedroe 48:46
but they thought the earnings would continue to grow because Japan was dominating the world in electronics and everything else. There was one semiconductor plant left in the US. So high valuations could, in theory, be justified now, I think most economists would have said it was a bubble and it would eventually burst, which it did. But, you know, people were saying the same thing in 85 and they kept, prices kept going up, and they Greenspan said the same thing in the US in 96 and prices went up for three and a half more years almost.

Andrew Stotz 49:22
Well, wouldn't you say that buying something on 40 times PE the risk is extremely high?

Larry Swedroe 49:28
Yeah, yeah. Why is it trading? See, here's the way you have to think about it. Why is it trading at that level? Why, if you assume markets are logical, which are not always perfectly so that means that people expect the earnings growth to be spectacular. So now that can be true of any one company, like Nvidia has been but it cannot be true of every company in the semiconductor space, growing earnings. Is high enough to justify 40 PES because within 10 years, they'd be the whole economy. So we're not saying that the market's rational. We're saying that it's efficiently pricing in what people are expecting. Whether that expectation is right or wrong is another thing, and we have talked about this, that there are what are called limits to arbitrage, which prevents sophisticated investors from correcting over valuation because of the risk of shorting, is unlimited losses. You rarely see markets undervalued, except in panics, maybe for a short term, because that's easily corrected. You could just buy and your losses are limited. So what?

Andrew Stotz 50:44
So, just to wrap up this concept of risk adjusted return, let's go back to theory and imagine that at the moment, let's just say all different alternatives are priced perfectly, and on a risk adjusted return basis. Does that mean that in that case, the only thing that really matters when constructing a portfolio is correlation between these different

Larry Swedroe 51:15
No, I would say this. I would say, you want to find assets with the lowest correlation and good returns are expected, but you have to have confidence in them. So if someone's worried about climate change, and if we have three bad years, they'll fire their advisor and fire the firm, then I would say, don't buy it in the first place. Another example there's a firm called AQR, which runs a style premium fund. So based on the historical evidence, they have some of the best finance people in the world working there, rocket scientists, PhDs, best databases, best trading execution of anybody in the world, probably or at least as good as anybody. And when they do so they go long value, short, growth or short, they go along what's cheap and short what's expensive. They go long things that have high yields. It's called the carry trade. And short things with low carry. Okay, so you might own you Australian dollars assets and short German assets, and earn that carry on average. And they have go long things with positive momentum and go short things with negative momentum. And they go the fourth is they go long quality stocks and short jump. When that fund came out, I think in 2013 or 14, they expected a return of four to 5% above t bills, and that's virtually what it's done, something reasonably close to that. That's amazing, right? That 12 years later, you got pretty much close right to what the returns were. And yet, the first four years or so, it had great returns. Getting very close to that. T bills were about two, so it got seven, totally uncorrelated to anything that's a great asset, right? Volatility, about half of the equity market the next three years have lost about 35% people fled billions, fled the Fund, and the next several years, it earned over 25% a year, and it's up nicely again. Your only way you get the good returns is if you can stay the course and not panic and sell so you have to have a belief and understanding, a willingness to absorb bad periods and what you should think, okay, it's down 35% but I only own five or 10% of it. My portfolio is doing okay, and I hope that there'll be periods like in 2022 that fund was up 25% or something like that, when the S and P was down double digits, and so was US bond funds, right? That's what you want. In fact, someone once said, If there isn't a part of your portfolio that's doing poorly, you're not diversified enough.

Andrew Stotz 54:27
Okay? I think the

Larry Swedroe 54:28
behavior determines outcomes more than assets in some cases. So what I tell people is, there is no one right portfolio. The models in my book are good starting points for you to think about. Maybe, okay, but the right portfolio for you is the one you're most likely to stick with, assuming you didn't take more risk than you had the ability, willingness or need to take.

Andrew Stotz 54:58
Well, um. I think we should probably wrap it up. I mean, we've covered so many things in

Larry Swedroe 55:05
let's cover one more quick thing. Let's do it one you can read about this in my column at sub stack this week, on the virtue of single factor funds, so it invests in value or small cap or quality stocks or integrated funds so dimensional and Avantis, for example, build funds that might be small value, screen out negative momentum and buy high profitability. It. Many people think the best way to do it is just buy the fact that you want. That's the absolutely wrong way to do it. I explained in my paper, why, in my article, why. And a simple explanation might be this, so you have a company that stock is crashing, and now it becomes a value stock, right? The PE is falling. It's gotten cheap, so you're buying it, and over here you own a momentum fund, and it's turned negative momentum, and you're selling it. So you have paid two transactions costs, maybe even realize the gain in a fund, and you end up with exactly the same position because you undid the trade that you did, right? It makes no sense. What the research shows is ensemble funds are much better structures, because what you're doing is avoiding buying something that's cheap but junk, so that's a value fund only, and you didn't screen for value. Or you could own a high quality fund, but it's expensive, too expensive, maybe, so you're better off Owning a fund that screens for both. So it's got maybe second quartile in both, rather than top quartile on one and bottom quartile on the other, and you get better returns, lower draw downs, lower trading costs, more tax efficiency. So you want, instead of owning a small value and a quality fund, own a small value quality fund like Avantis or dimension

Andrew Stotz 57:21
so where the fund manager is bringing together the various factors to then make a final decision on each

Larry Swedroe 57:31
stock. Yeah, of using systematic rules, not their judgment.

Andrew Stotz 57:37
Okay, and okay, so that I, you know, I did, I did read that when you, when you, when you sent it on sub, now that you mentioned it, and I did that, this integrated approach and all that. So, yeah, that's interesting. And that's, it's a good reminder for all of us to keep up on Larry sub stack. But maybe as a, as a wrap up, I'll give the last word to you. You know, what do you want people to take away? We spent a lot of time talking about what you've written about in your book. We've talked about a lot of things outside of that. We've talked about theory, we've talked about practice, we've talked about stories. You know, what would be the last thing you would want people to take away from all of this discussion and what you've written in our talks.

Larry Swedroe 58:21
Yeah, the first thing I would say is, my son in law is really handy. Anything goes wrong in the house, he can somehow fix it. I'm exactly the opposite. I will not try to do anything more than screw in a light bulb or bang a nail to hang a picture, because I will end up creating a problem that will cost twice as much to fix if I hired a Handyman in the first place to fix it. The same thing is true of investors. There are people, maybe, who have all of the skills and all of the behavioral traits needed to do it themselves, I would suggest that that's less than 1% of the population. Based on my 30 years of experience. People are far too over confident of this skills. They don't have the time to do all the research, read the book, all the books that I've written on people like Bill Bernstein and others to get the knowledge, but then to do it right, you have to integrate that into a well thought out estate plan risk management, meaning insurance of all kinds. So I think the vast majority of people are better off finding a an advisor who is truly a fiduciary who fought who makes investment decisions based all only on the empirical evidence, and puts their money where their mouth is and accepts payment only from you, no commissions or anything else, and is willing to show you that their investment. Investing their own money in exactly the same vehicles, although it could be a different asset allocation, because their ability, willingness and need to take risks. Get yourself educated. You don't have to read all, for example, 18 books I've written, but read three or four of them to get that deeper understanding of the basics of finance. You know, education may be expensive, in this case, is pretty cheap. You can go to library, pick up any of my books or buy them on Amazon. But ignorance is much more expensive in investing than education will ever be. Last thing, make sure you build this integrated plan. I'd recommend reading my book, Your complete guide to a successful and secure retirement addressing all kinds of issues, including things like elder abuse, fraud committed against older people, women's issues and stuff, has seven chapters on investing, and the rest upon how to build a life in retirement and make sure you enjoy it. Have that well thought out plan, and make sure one you don't overestimate your ability, willingness or need to take risk, don't own assets that you're not willing to stick with at an absolute minimum of, say, 10 or 15 years and survive and say, Well, I just had bad luck and risk showed up, and I'm going to stick with it, and I'm going to actually have to keep buying more, because my asset allocation is targeted 5% now I'm down to Three. If you aren't willing to do that, then you shouldn't own that asset in the first place. And keep in mind that every single risk asset, including US stocks, goes through very long periods of horrible performance. We've talked about the three periods in the US of at least 13 years where they under perform T bills, and there's no guarantee that the US is in the next Japan, where for 36 years they earned less than a 2% nominal return, which means probably close to zero there. So that's the best advice I could give other than pick up, enrich your future and get a good education on a lot of these issues. Well,

Andrew Stotz 1:02:28
I want to thank you for this discussion, and it's been great to learn from you, but also to get to know you and the way you think about things. It's definitely added a lot of value in my life and in my thinking. So I appreciate that. And in closing out this session, I'm not going to say what I normally say, which is I'm looking forward to the next chapter, but I think we can look forward to some next discussions on interesting topics. And for listeners out there who want to keep up with all that Larry's doing, you can find him on X Twitter at Larry swedrow. Can also find him on LinkedIn, but most importantly, subscribe to his substat, where he is sharing stuff that's fantastic value, as we've just talked about, integrated versus ensemble type of factor investing. This is your worst podcast host, Andrew Stotz saying, I'll see you on the upside and.

Andrew Stotz 00:02
Andrew, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy com, continuing my discussion with Larry swedrow, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story in Episode 645, now Larry stands out because he bridges both the academic research world and practical investing. Today we're diving into a chapter from his recent book, enrich your future, the keys to successful investing. And specifically we're going to be talking about chapter 41 A Tale of Two strategies and the final chapter, chapter 42 how to identify an advisor you can trust, Larry. Take it away,

Larry Swedroe 00:37
right? So it was the best of times. It was the worst of times. Probably the most famous words in all of literature. They're the opening lines of Charles Dickens, A Tale of Two Cities, which is all about, of course, the French Revolution. However, these words apply, I thought when I wrote this book just as much to the world of investing. For active investors, it's kind of the worst of times, because 20 years ago or now, it's 27 years ago when I wrote my first book. At the same time, Charles Ellis published his famous book, which is something like in its eighth edition. Now I've only had second editions of books, not eight. But he found in 1998 that about 20% of active managers were generating statistically significant alphas or out performance on a risk adjusted basis, before taxes, some for most people are taxable investors, unless you're endowment or a pension plan. Then, since taxes are the largest expense active investors face, if you're taxable, it's probably with something like 10% and as we discussed here, it certainly meant that you could outperform but Ellis called it the losers game because the odds were greatly against you, in the same way you can win in the casinos in Las Vegas or Macau, but the odds are also greatly against you, so it's okay to have a small entertainment account, take a trip for A weekend, and then maybe for some people, losing 500 or 1000 bucks, that's fine, and they had a good time. For other people, maybe 100 bucks might be the limit. And unfortunately, it wasn't that long, just 13 years later, which is now 14 years ago, faume and French famously wrote a paper showing that only 2% of active managers were now outperforming on a statistically significant basis. You know, that's 49 to one odds against you, and that was before taxes.

Andrew Stotz 02:59
How like were those studies? Were they pretty similar? I noticed that you mentioned before taxes is that they're both basically done on the same four

Larry Swedroe 03:07
taxes. And subsequent studies have pretty much confirmed that there was another study I forgot. Who did it? It's something like 2% also. And as Andrew Birkin and I explained in our book The Incredible Shrinking alpha, we explain why the trend was getting worse for active managers and why it was likely to continue to persist in getting worse, because the people who are quitting active management were the people likely who didn't have the skills or were unlucky. Either way, they leave. And if you have, if you are less skilled, there's less victims for the active investors to exploit. And they need victims because it's a zero sum game, even before expenses. So people are leaving, the competition is much tough. 30 years ago, you got out of school, maybe you had a Literature degree, and you went to work for Goldman Sachs, and they trained you to be a security house. Today, you need a PhD in Nuclear Physics, let alone and finance to go work for some hedge fund that's who's managing money today, so their competition is and the databases are much tougher, and you have artificial intelligence helping everybody, but clearly it's going to get harder and harder for active management to win, the more people leave the game and keep switching. Now we really want to keep this a secret, that it's a loser's game, because we do need some naive investors to continue to be the suckers at the poker table, because that we need active managers their price discovery efforts to keep the markets efficient and pricing. Now what's important to understand is. This in the 1950s the markets were still pretty efficient. The research showed active managers were not outperforming generally, and there wasn't persistence of out performance. And there was only about 100 mutual funds today, there are 10,000 more than twice as many as there are stocks, when you count the all the ETFs. So you know, the industry could shrink 90% and we'd still would find, I think, the markets highly efficient, especially because the remaining people would be the Warren Buffett's, Peter Lynch's citadels, Renaissance technologies. And they would keep markets highly efficient. So these are the worst of times, I think, for active managers. On the other hand, it's the best of time for the passive or systematic investors, is the term I like to use. So using quant strategies that are systematic, replicable and transparent, like those of dimensional fund advisors, Avantis BlackRock, even Vanguard uses systematic strategies, not just pure index funds, which we've pointed out, are perfectly okay vehicles, but they do have some negatives that can be either minimized or eliminated by intelligent design, including patient trading and the cost of literally gone to zero. Who can own an S and p5 100 found or a total for virtually or either zero expense ratio? And you have many vehicles. You know, when I started investing with dimensional, if my memory is right, in 1995 their small value fund, which is a systematic strategy, was like 92 basis points. I think it's in the 20s. Now, caught you've got better vehicles, more sophisticated, updated using new research, better trading strategies, and the costs have come way down. So for active managers, it's the worst of times, and for passive or systematic strategies, it's actually the best of times.

Andrew Stotz 07:17
And I was just looking online, and the ICI data shows that actively managed funds were about 49% of total funds as of April of 2025 versus passive at 51 so I think it was two years ago, or a year and a half or so that active actually exceeded passive for the first time, which is one of The other way around. Passive exceeded, yeah,

Larry Swedroe 07:42
that's roughly 5050, now from studies.

Andrew Stotz 07:45
And you know, I'm reminded of when I was a broker. We that the EU came up with something called method two, and it was a way of trying to deal with the costs of funds and ETFs, and they came up with all these regulations to try and what it ended up happening is that they they pretty much increased the cost through those rules and regulations, and they destroyed the independent research providers that they thought they were propping up. So the unintended consequences were incredibly destructive, in my opinion, for the industry in Europe. But what fascinating is, you just take one crazy man, John Bogle, yeah, with one very counterintuitive against an American idea, yep. Yeah. Very different, you know, I am very different from what was happening. He challenged the convention. He overturned it, and he basically by just that movement of one man in a capitalist society that allows you to bring any product, any service, in any way, into the market, single handedly, that man probably reduced fees that people paid from when he started till today, by at least 50% on average that people pay

Larry Swedroe 09:06
Andrew. You know what's amazing? I mentioned that Ned Johnson, who was the chairman of fidelity, when Bogle introduced Vanguard's first S and p5 100 fund, he called it unAmerican. Why would anyone want to accept average returns? Well, Johnson was the fool because he was confusing market returns with average returns. If you get market returns by definition, you have outperformed the average active investor, because you've got lower costs than they do. And if you own the market, they collectively have so they have the same gross returns, but much lower net return. And today, fidelity is one of the world's biggest provider of low cost index funds.

Andrew Stotz 09:55
Yeah, there's two things I want to mention just before we leave this topic in. The first one is. About tax, and the second one is about the factors. So, you know, a person can own, as you mentioned in this chapter, a fidelity as an example, fund that's zero, you know, and there's others that are, you know, the fees are so close to zero for just a total market fund. But then, as you've mentioned in here, there's also factors within that there's factors like value, size, momentum, profitability, quality, low volatility, these types of factors. So that's, you know, one thing I just wanted to mention. But the other thing I just want to understand is, when we talk about taxes, what do you when you say, not considering the negative impact of taxes, are you talking about the impact of taxes within the fund as they're buying and selling? Are you talking about the tax impact when the person who owns it is selling

Larry Swedroe 10:47
it? You're talking about both, because actively managed funds have much higher turnover, so they realize more short term gains, more long term gains. Now that has been mitigated to a great degree by the introduction of ETFs. So I always tell people, if you're going to invest, at least in the US, in taxable accounts and equities, no question you should own ETFs. Now, ETFs are often, but not always, a bit cheaper than a mutual fund. Avantis, for example, charges the same, but others are a bit cheaper. Vanguard, I think, is the same, but at any rate, you do have a bit more expenses, because when you trade a mutual fund, it's at the nav so there are no trading costs there. You may pay some small commission, but with ETFs, you do have the bid offer spread, but that's, you know, it is an expense that you can avoid by owning a mutual fund. Well, you would

Andrew Stotz 11:56
have had that bid offer spread if you were building a portfolio of 10 or 20 stocks, you would have had that bid offer spreads with those different 10 or 20 stocks. Times,

Larry Swedroe 12:04
10 times, not once, yep, but in an IRA, you should never own an ETF. You should only own a mutual fund because you don't have the trading cost that bid offer spread.

Andrew Stotz 12:16
So let me go back to this for a second, just because many people don't understand how an active Fund Manager works. And let's talk about an active fund for a moment. When they're buying and selling, I'm assuming that they're paying, you know, people would assume, when they look at it like, okay, they bought a stock for 100 they sold it for 20, 120 they made a 20% return. They did that in three months because they're a good trader. Are they paying a tax on that 20 game?

Larry Swedroe 12:45
Yep, absolutely. So that, because they have to pass through the net gains at by the end, you know, during their fiscal year, which typically might run from October to October.

Andrew Stotz 12:58
So let's say for the fiscal year, they've done all of this trading, and they ended up with a 20% average capital gain. And they ended up with, you know, a certain amount of tax of that capital gain. How does the investor does that come in? What part of that comes in the nav versus what's, you know, fed

Larry Swedroe 13:19
through to us? You would get a 1099, it's called, it's a statement from your custodian, and it would show how much of your return was in the form of dividends, some of which can be qualified, and they're treated like, more, like capital gains. Some are non qualified, and that's treated as ordinary income. You have short term capital gains, which are treated as ordinary income. And if you live in California and you're a high bracket investor, you're paying 43% or so federal tax and maybe 13 or more percent California tax. So you're and then there's long over 50% of your return, if, on the short term gains have disappeared, and for the longer term gains, you're paying 23% roughly, plus the state tax. So you're going to give up a large percentage of your returns. Now, as I mentioned, ETFs, through some technical mechanisms, basically avoid most distributions. Most ETFs don't distribute any capital gains or very, very minor here's the thing, Andrew, most people don't know if, let's assume the average fund actively manages expense ratio 1% but because they're active, they have to sit on some cash. Let's for argument's sake, that's 10% of the portfolio as they're waiting looking for good ideas and stuff, right? Half? Have liquidity to meet demands of people redeem, etc. Well, today, cash is yielding. You say 4% and stocks, let's say have an expected return of 10 so you're giving away 6% on over the long term. Now, in a bear market, cash would help you, but on average, markets go up. That's one cost cash. Second costs you have are, of course, any bid offer spreads that are called market impact costs. When you want to move a large amount of stock, that's increased because there's much less liquidity today, as we have discussed. And so you not only have the bid offer spread, say it's 10, bid 10 and a quarter, ask for 1000 shares, but you want to sell 100,000 you may end up with an average price 10 and three quarters, and then the price drops right back to to 10, and you just paid away 7% in market impact costs. You know, market impact costs are significant. And then, of course, you have taxes, and those easily, collectively, could be three, 4%

Andrew Stotz 16:15
and can we go back to the tax for a second? So let's say that you get it. You get your 1099, statement. It shows what's portion is, you know, dividend qualified, unqualified, short term, long term, you have these components now that also means that that fund manager, through their activity has generated that either the dividend income from what they own or the short term and the long term capital gains, when they actually execute those trades throughout the year they're incurring and building that up. Are they paying tax on those trades?

Larry Swedroe 16:49
No, the mutual fund doesn't pay the tax. They allocate out the taxes to the ownership. Pro rata there. I may not remember this exactly, but Russ warmers did a study, pretty famous one in the early 2000s looked at this, and he found, as you would expect, because we, as we discussed, the average retail investor, the stocks they buy go on to underperform, and the stocks they sell go on to outperform? Well, somebody's got to be on the other side of that trade. Turns out it's professional investors, institutions, mutual funds. They are good stock pickers. The problem is they gain, let's say, 60 basis points a year from their active stock selection skills, they charge you 1% your cost of cash, he estimated at about 70, and your transactions costs were another 1% or so. So the average fund underperformed by one and a half percent or something like that, even though that was pre tax, even though the stocks they picked out perform.

Andrew Stotz 18:02
Was this the concept of active share? No,

Larry Swedroe 18:05
not active share. Okay, if you pick up my original book, you'll find rust formers, and you could dig up the stuff.

Andrew Stotz 18:12
Okay, fantastic. Well, let's move on. Let's move on. Before we do that,

Larry Swedroe 18:17
I want to end with the moral of the tail. Okay, do that one thing we haven't really covered. Sorry about that. By tales, not only has an analogy, but has a moral. So this one I write, when Dickens wrote those famous opening words, perhaps he knew that. Would it be applicable to all times. They certainly are applicable to investors today for the majority of those who continue to place their faith in the practice of active management, it has been the age of foolishness, the season of darkness and the winter of despair. However, for those who have adopted a passive investment strategy, that has been the age of wisdom, the season of light and the spring of hope. Wow, that's the moral of that tale.

Andrew Stotz 19:07
So what do you want? We want light and hope, yeah, all right. So chapter 42 how to identify an advisor you can trust,

Larry Swedroe 19:21
yeah? Well, when it comes to like home repairs, there are individuals like my son in law, he can fix anything. I can screw a light bulb in and screw a turn a screw in or bang a nail to hang a picture, anything beyond that, I know I will end up paying twice as much to undo the damage than if I paid a repayment in the first place. Right? So there are people have the skills, and they should try to do it themselves, and it obviously, then is likely true of investing the problem. Is that so many investors are overconfident of their skills and being able to pick stocks time the market, identify the best investment vehicles. And on top of that, you not only have to have all those skills, you have to have the behavioral skills to be able to set up your plan and then stay the course, avoid all of the biases we've discussed, like recency bias, tracking variance, or get regret because your portfolio underperformed the s p5 100, even though you decided you didn't want the s p5 100 because it's all in one risk, and it's had three periods of at least 13 years where it underperformed T bills. So you wanted to diversify, right? But even that's not enough, because a good wealth advisor, not just an investment advisor, not only helps you build a plan and choose the best investment vehicles that'll give you the best chance of achieving your life and financial goals, but you integrate that plan into a well thought out estate tax, insurance of all kinds plan and then helps you adopt over time as life events happen, changing those plans adopts to the latest research. 10 years ago, I wasn't investing in any alternatives. Now half my portfolio is alternatives, and having the knowledge and ability to do the due diligence understand how the world has changed is important. So those are all things investors should know. But I created a list here in the book of 11 commitments that advise investors should demand of an investment advisor. So when you go meet with them here, here we go. So number one, the firm should be able to demonstrate that it's guiding principles is to provide investment advisor services that are in the best interest of the client. In order to do that, principle number two is you should demand in writing that you that the firm is providing you with a fiduciary standard of care which is fitted the highest legal duty. It differentiates itself from the suitability standard which all people generally who work for investment firms like Merrill Lynch and Morgan Stanley their fiduciary responsibilities generally not to you, but to their firm. So let me just give a simple example of the difference. I worked at a registered investment advisor in the US all RIAs are required to be fiduciaries if I want to invest in an S and p5 100 fund, I'm required, say, to offer them Fidelity's fund, or Charles swaps Fund, which costs a few basis points. If I worked in Merrill Lynch, they may have or some insurance company, they can have an S and p5 100 fund that costs 75 basis points, and it's suitable, but clearly not in your best interest. I have talked to hundreds, if not 1000s of investors who work with those kinds of advisers, and none of them know the difference between the suitability of fiduciary sin, they all think they're required to give advice that's in their interest. So that's number two. Number three is the firm should put in writing that they're a fee only advisor, meaning the only one compensating them in monetary ways, is someone meaning their client. So you can't get a commission from anybody else because that commission could bias you. Obviously, I could tell a quick story. I was invited to be a guest speaker on this investment advisor here in towns radio show. I had to be very careful what I said, because he was work for insurance company, and his big thing was selling annuities. So I had to be very careful as a guest, I didn't want to, you know, be too impolite. But after the show, I said to him, said, Look, we're offering our clients the same investment product, without all these bells and whistles, which are just big expenses you're you know, and we charge 1% a year, and we're providing estate planning, insurance, all these other advices, and we act as a fiduciary. It. And the guy said, Well, why should I do that when I get an 8% commission upfront? And I said to him, how do you look yourself in the mirror? And that ended that conversation. I was never invited back as a guest, right? It's required of all registered investment advisors. They're fee only. Can't be anything else. You must disclose. The SEC requires them what's called the ADV, or investment advisory agreement, that all potential conflicts of interest are disclosed the firm, very importantly, should be client centric, okay, meaning they deliver sound advice that's only in the client's interest. It's unique to them. Okay, most importantly, or one of the key things, is their advice. They must be able to demonstrate to you that their advice is based on empirical, academic research, not their opinions, like, I think the market's going up, or this stock is going up. We've gone through the evidence on active management. So why would you choose someone who's doing that, you know, and stuff. Everyone people ask me, What do you base that recommendation on? I can show them. Here are the academic papers in my book with Andy Birkin, your complete guide to factor based investing 110 academic papers decided. As you know, in all my books, I cite the literature. These aren't my opinions. They're based upon what the research says. You want to make sure they deliver a high level of service. So they're working with a small number of clients, not 250 or whatever, that they have a team of experts who no one's an expert in all fields. Some are more knowledgeable about investing, some about taxes, some about insurance, some estate planning. And you want people who are giving you advice to have the professional certifications that say they are an expert in this. You know, in that advice, you want to make sure they develop a plan that's integrated, because investment decisions have tax consequences. They have estate planning tax consequences, things like that. You want to everything should be integrated, and how one investment impacts the rest of the investments and the whole estate plan, their plan should be goal oriented. Every investment should increase the chances of achieving your goal, and they should be required to show you why that's the case. So those are all things. If you can't get all of them, just walk away, because there are 1000s of good advisors who can provide those services. Oh, one other thing demand in writing to see that they are investing their personal money in the very same vehicles they're recommending. Now I wouldn't expect it to be the same asset allocation because they're a different person, different age, different job stability, different ability, willingness, and need to take risk, but I was always happy to pull out my Schwab statement and show them. Here's my investments. Now some people might not want to show them the dollar. Them the dollars. That's fine. Blank out the dollars, but you could see what the vehicles are if they won't show you what they're investing in. Wave goodbye.

Andrew Stotz 28:53
And is this a tough standard, a normal standard? You know what? I think it's

Larry Swedroe 28:59
very simple. If someone's not prepared to do it, why should you trust them? Yep, every one of those things should be there. Now it doesn't mean, for example, you may have an investment advisor who outsources the tax expertise to some attorney they work with. You know, that's fine, but I think it's best if all those resources are in house, because every decision, or many decisions, are integrated, and you have to make sure you're reviewing everything with each decision.

Andrew Stotz 29:32
You know, there was a time where this, all that you've just talked about, was not very commonplace and not regulated in the way that it is in the US and in fact, in markets around the world, particularly in Asia, that's not common. And in fact, you'll see that they really, not only has the regulator not gone where the US has gone on it, but you also have investors who say, I'll never pay for financial advice, you know? And. So it's the same thing, a little bit like trying to get independent research, where you do try to sell independent research to fund managers. Say, why? Why should I pay for that? I get it for free from a broker, right? Yeah, and it's a similar type of thing. It's very interesting. And you know, I'm wondering,

Larry Swedroe 30:15
the broker charges you the 8% commission product that was, you know what I pointed out to a friend of mine? You

Larry Swedroe 30:56
i He loved his broker because and then I looked at his returns and showed him he'd underperform for years. I said to him, those are the most expensive suit. I don't know what happened. Well, I think

Andrew Stotz 31:09
we caught most of that, but just you can wrap up that final point you were saying,

Larry Swedroe 31:13
yeah, let me get I'm trying to shut down some things, so let me see if I can shut this. Okay, alright, oh, wait, I can shut one more thing down because I was working on something else. Okay,

Andrew Stotz 31:35
so maybe go back to that, the that story, yeah,

Larry Swedroe 31:39
okay, oh, here we go. I'm

Larry Swedroe 32:12
all right, just up in the corner here. Now, weird? Yeah, you're not hearing me, huh? I

Andrew Stotz 32:18
hear you, and you're a little bit sketchy on the video side. Here we go. Let's see.

Larry Swedroe 32:40
Okay, we're back on. We are back all right, so you

Larry Swedroe 33:18
so, this is one of my favorite stories. I don't know what the story is, Andrew, let me try one other thing I'm going to sign off you.

Larry Swedroe 34:19
Uh, okay, I think that should do it. All right, yeah, all right, so I'll start, and I'll tell that story. So one last story to round this last chapter out. One of my favorite stories is this one. I had a friend who had a broker, and every year, I mean, he would rave about this guy, because he'd get tickets to the Super Bowl to you. Golf Championships, whatever. And I would ask him to say statements and stuff, because that boy I get to

Larry Swedroe 35:20
the expensive tickets he had ever gotten for free, he could have bought tickets online at StubHub or something for 1000s of dollars less than he actually paid for his free tickets because his performance was so bad and there was so much tax inefficiency,

Andrew Stotz 35:46
right? Yes, well, it's, it's incredible how easily people can be manipulated on that. And I see that. I see that in Asia a lot too, where private bankers and others are losing people a lot of money, and then they take them out for nice dinners, and they take, you know, get them all kinds of perks, and they Love it. And so they

Larry Swedroe 36:08
ask, what kinds of you

Larry Swedroe 36:32
perks, they are in Thailand, right? All right,

Andrew Stotz 36:37
I'm going to wrap this up so Larry, I want to thank you again for this great discussion, not only of this chapter, but of all, all 42 chapters, which has been incredible. I want to do a wrap up later on this, but I look forward to that final wrap up. But for listeners out there who want to keep up with what Larry's doing, you can follow him on x, and you can also follow him on his sub stack and on LinkedIn. This is your worst podcast host, Andrew Stotz saying, I'll see you on the upside.

Andrew Stotz 00:01
John, hello fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, and I want to thank you, especially those people from Belgium joining to the mission today, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Peter slagers. Peter, are you ready to join the mission?

Pieter Slegers 00:36
Yes, let's have some fun today. I'm truly looking forward to it, and thanks for having

Andrew Stotz 00:42
me. Yes, I'm looking forward to I really, really admire what you're doing, and I want to talk a little bit about it before we get to the questions. So, but let me introduce you to the audience. So Peter is founder of compounding quality newsletter. He studied financial management at KU Leuven and graduated summa cum laude. He worked for three years at a Belgian asset manager before focusing full time on his investment newsletter, which he started in July of 2022 compounding quality has more than 1 million followers across social media and almost 500,000 email subscribers, including me now, and the goal of the newsletter is to help others investors by focusing on quality investing. Peter, take a minute and tell us about the unique value you are bringing to this wonderful world.

Pieter Slegers 01:34
Sure, first and foremost, Andrew, I loved your intro, and I think it's amazing that you are doing this podcast and allowing people to listen to this for free, and helping other people so, so that's lovely. So I truly appreciate your introduction. So that's exactly what I'm doing today. So I'm writing on the compound and quality. What's in a name? Well, compounding on the one hand, let the magic of compound interest work for you, and then quality on the other end, well, quality investing. I try to do that by investing in quality stocks. And I always say to people, well, I'm the most lucky person in the world. Why? Because I have two big passions in my life. One is investing. Obviously, that's why we are here, and investing is it's my job, but it's also it's my hobby, it's my passion, it's my everything. Once my ex girlfriend said, Well, you love the stock market more than you love me. And yeah, it's a shame, but she was probably right, because we broke up a few months later. So the stock market is definitely a passion. Now, the other hand, it's teaching. As a kid, I always wanted to become a teacher. And as a matter of fact, when I would go to university, when I was about to go to university, wasn't that should I go? Should I pick the teaching part or the investing part? Well, I studied financial management or the local version of an MBA, so I picked the best thing, but the teaching passion also never left me, and now with the newsletter, well, people can follow your portfolio. You're writing about it, and you're teaching people how to do it themselves. So I'm combining the two passions, and I'm probably the most lucky person in the world, because I'm always very excited on Monday morning. And that's a very luxury thing to have, right?

Andrew Stotz 03:25
Yeah, as I always say, T, G, I m, thank God it's Monday. Then you got a dream life, right? If you love Mondays and getting back to work, then you know you've got, you'll definitely love every other day of the week. So that's awesome. Let me ask you, when you look at your stocks, that you consider for your you know, for your newsletter, how many markets are you looking at? I mean, are you looking globally, or is there a narrow set of markets, or markets that you can trade through? I don't know. Let's say Interactive Brokers or some others. Or how do you narrow that universe? Or how narrow is the universe?

Pieter Slegers 04:05
Yeah, it's an interesting question. Andrew, you are based in Thailand. I'm based in Belgium, near Antwerp. Some other people will be based in the US or Australia, what have you. And the same is for me regarding my investment philosophy. So I'm truly a bottom up stock picker. And I don't care whether a stock trades in the US or in Belgium or in Poland or in Thailand or in Australia, you just try to find the best companies in the world. And when I find them, I try to invest in them. Well, one side note I would make is, for example, when we are talking about Thailand, and I also get a lot of questions about India, China and so on. Well, I prefer, personally, to stay within the developed countries. Why? Because I don't think emerging markets are within my circle of competence. So one thing that's really important to understand and to master, I think, as an. Investor is that you truly understand the culture of a company, and to do that, you need to truly understand the culture of a country as well. Well. For me personally, it's a pity, and hopefully that will change soon. But I've never been to China. I've never been to Thailand before, so I just don't know how the culture works there. While been to the US three times this year already? Well, I live in Western Europe, so it's way easier for you to get a feeling there. So that's what you're trying to do. And what you try to do as a quality investor is try to find companies that can grow their intrinsic value year after year, and when you hold them long enough, and you are right, well, stocks will always follow the evolution of the intrinsic value. So that's the essence of the strategy there. And when I look at my portfolio today, it's invested in 16 companies, some companies from the US. I have a company in Australia. I have two companies in the UK, one even in Poland. So it's very diversified in general. And one extra thing you could say is, well, look what's happening with the USD, for example, it's weakening. It's very weak right now. How do you think about all the VIX movements? Well, I know quite some people, and have quite some friends who became very wealthy by investing in stocks, for example. But I've never met a person who has become very wealthy by trading ethics or trading foreign currencies. So my point I want to make there is you just don't know. You don't know how the dollar will move compared to the euro or another currency. And some in that perspective, sometimes you lose, sometimes, sometimes you win, sometimes you lose. Meaning the VIX movements are volatile. But in the end, for example, maybe you will win in five years from now, from the Polish slotty, which is appreciating and the dollar is weakening. But in the end, in the long term, well, I think the effect will be very limited, and it will be all about the evolution of the intrinsic value and how much shareholder value is created by those companies.

Andrew Stotz 07:08
Yeah. And one, you know, one concept behind that is that foreign exchange is a zero sum game, exactly in the sense, if one's going up, another one's going down. And so if you look at the long term returns on forex investing, in theory, it should be zero, as opposed to investing in stock markets. So I think there's a strong argument say, if you invest globally in equity, you're going to have the equity and the foreign exchange exposure to those so that makes sense. And as far as the companies are concerned, curious, you know, one of the hard parts about looking at quality companies is that quality companies are not cheap, right, like, and they're, it's not like they're, I mean, yeah, yes, we can find one or two or three in our lifetime that goes from, you know, average to great quality, high quality. And that's, you know, that's a dream, right? Because we're riding not only the revenue growth, but we're riding the margin expansion, as the company is getting better and better and charging a higher rate for, you know, for their products and services. But I'm just curious, like, how do you deal with the fact that quality can be expensive?

Pieter Slegers 08:24
Yeah, I think for quality investors, it's always you first start with looking at the quality of the business, and then the second point is valuation. But as you mentioned, it's also even the best company in the world can be a terrible investment if you overpay. Well, I always use three methods to value a company. First, is very naive. Just compare the forward PE with its historical average. It's naive because you don't look at changes within the company, the outlook and so on, which might be different. And that's also why you're using earnings growth model and a reverse DCF. Well, maybe that would go too far, and if not, please elaborate on it. But people can also find out about that on the website, about how to execute those models. But the general point I want to make is, well, why is quality if you are right, and if it's actually quality stock, and if the company has a moat, structurally undervalued in the long term. It's because when you, for example, do a discounted cash flow model, and I'm sure, I'm sure you've done hundreds of them in your life, Andrew, you make the assumption, look, I'm going to predict the free cash flow over the next 10 years, and after year 10, I will use a terminal growth rate which is in line with the economic growth. Well, the great thing about those quality companies is often they can grow at above average rates for way longer than 10 years. And I don't encourage people to do that. But what happens is, if you predict above average growth rates for 15 years or 20 years in a DCF, for example, you can try it on. Almost every company is undervalued. So that's a very important thing to make. It's a dangerous thing, but sometimes it can, yeah, you can get rewarded to pay up for quality. And a funny story I have about that. For example, when I was 16 years old, I worked for a local security bank in Belgium. And to me, that was so cool, but because it felt like I was working in the Wall Street of Belgium. And in hindsight, Belgium is, is obviously quite, uh, small compared to Wall Street. But anyway, I still recall that it was, yeah, 2016 2017 that I needed to create a report about everything related to EVs, electric vehicles and everything with batteries and so on. And I was writing an investment case about BYD, so one of the favorite stocks of Charlie Munger. And my thinking there was, I was doing the case. I analyzed the entire space, and I came to the conclusion, look, I think BYD is the most interesting one in this space, so I want to buy it. But what I thought, Look, what I thought back then, 10 years ago, well, everyone knows that electric vehicles and batteries will become so important, and BYD is so expensive, and everything is priced, priced in already. Well, in hindsight, I should have bought BYD, because I think the stock is up, depending on where you start, exactly 6x plus 600% more or less. So the point I want to make there is some of those structural trends can last way longer than most people think. And don't get me wrong here, I don't want to say that valuation isn't important. It actually is, and especially in the short term, there can be huge stock market fluctuations, but you try to pay well, as Buffett said, you want to buy a wonderful company at a fair price over a fair company at a wonderful price. So you will almost never find those companies at very cheap valuation levels, but when you just pay a reasonable valuation level, that can also be very rewarding already. And that's the last point I want to make on this one. Then it's you have a very important or very impactful thing in the stock market and investing called reversion to the mean. So if something performs above average for long periods of time, it will go down and the other way around. But the interesting thing about quality is, well, reversion to the mean usually doesn't take place for companies with a mode, for companies with a high return on invested capital, and that's usually because those companies are so strong that other companies rivals competitors. They see that they are strong. They want to enter the market, but they just can't, because the company has such a wide moat, it's as Buffett said, Well, if you gave me 100 billion to take away the market leadership of Coca Cola, I would just give you back the money. And said, it's impossible. And those are the companies that you are looking for in the quality investment, quality investing framework.

Andrew Stotz 13:03
Yeah, in fact, I looked at 5000 companies across the world over a 20 year period, and I set 10 years ahead, and I looked at where their ROIC was at that first year of the 20 years. And then I looked ahead and said, Where was it in the second year, third year, all the way to the 10th year, and said, and then I broke the companies into quintiles, and what I found was that the highest ROIC quintile did fall as we went years ahead. But instead of calling it reversion to the mean. I call it reversion towards the mean. Yeah. So high quality companies remain high quality companies. You know, generally low ROIC companies remain low Ric companies, generally, they get closer to the average over time as a group, right? And that helped me to understand it's the same thing with, you know, whether you're looking at, you know, something like beta or whatever. If you look at that and people do valuations, and they use a beta that's, you know, high or whatever the current one is, betas also revert towards the mean. So these are important things to understand when you're valuing that, you know, things do change, but premium, you know, performance tends to last for a very long time. What about risk management? I know, you know, one of the typical risk management is, of course, the number of companies that you have in a portfolio, the concentration risk. Then there's, you know, sector. Some people do, you know, I don't want to be overexposed to any one sector, any one country or, you know, in more of a trading portfolio, they have stop losses. I'm just curious, like, what, how do you view risk management?

Pieter Slegers 14:47
Yeah, sure. And I think regarding risk management, multiple roads that lead to Rome or multiple roads that lead to heaven, just take Warren Buffett, for example, on the one hand, was very concentrated. And said, well, diversification doesn't make any sense for those who know what they are doing, right? It doesn't make any sense to invest in your 20th best Id just saying something. And then, on the other hand, you have Peter Lynch, who invested in more than 100 or over 100 stocks at the same time. I was very successful there as well. I think it's really important, in general, to just look at yourself and what kind of investor you are, and what how comfortable you feel to be concentrated. And I think in general, I'm more in the buffet camp, meaning, I think the more experienced you are as an investor, the longer you are investing, and this more successful your track record, the more sense it makes to be more concentrated and follow up very closely on those companies. While I'm today, I'm invested in 16 companies. Maybe it will increase to 1718, but not too many more. Um, I'm probably, this is my hobby. This is my passion. So I'm probably spending, I don't know, I'm not keeping track, but let's say 80 hours a week on doing this, and I have a hard time to follow up those 16 companies. So I can't imagine how you would follow up 100 companies, or over 100 companies like Peter lynchwood. And I also completely don't agree with, for example, like you look in universities, tracking the beta, the sharp ratio, the drawdowns and so on. Well, that's not risk. Risk is the permanent loss of capital, and that's the most important thing. And this is a bit different. But one thing that I really took away from work in the asset management industry as well, and in general, with compounding quality. Well, once again, as an investor, I think you should go over competition this week. Where is competition weak in the small and mid cap space? Because everyone is looking at Apple, everyone is looking at Microsoft. The market is way more efficient and way smarter there and when you can find those great compounding machines with a market gap of just saying something below 3 billion. Well there you won't find any information on the internet or almost non information, so you need to do your own homework. But when your homework is correct there, well things can be very lucrative. And I also see that in my portfolio, I have a small house trading company, my portfolio that is up 200% over the past two years, and that company is driving the majority of your results. If you take out that company, my performance would be very mediocre, but you'd only need a few very big winners to be very successful. And the same is true with Berkshire Hathaway, for example, Charlie Munger said at once, if you take out the 14 best, or the 14 most successful investments of Berkshire Hathaway, well, nobody, or almost nobody, would know Berkshire Hathaway. And I've went to Alma. I've been to Amma, physically for the AGM for the third year in a row this year, I probably wouldn't have gone to Alma when you would take away Gecko and Coca Cola and so on out of Berkshire, because then the returns would be very average. So letting your winners run in general is also Yeah, a very important one to move, versus

Andrew Stotz 18:13
Yeah. In fact, what's interesting is that in the last I asked my students this in my classes, I asked him, in the last 20 years, did Buffett outperform, perform in line or under perform the s and p5 100? And the answer that question is, he performed in line with the s and p5 100, and yet he still got a 20% average annual return over from 1965 so 60 years compared to the S and PS 10% return. But what was remarkable is, if you go back to 1973 1979 I think you had a couple years back then where there was massive returns, 100 100 or one year was over 100 so this also has to do with the sequence risk, and that is the idea that if you get your winners when you're young and at the beginning of your period, and you let that compound, you still end up a winner at the end, even if you didn't outperform the market for 20 years. So as opposed to if you had, if he had had those winners at the end of his investment career, then I think Warren Buffett would have been just another very great, you know, very good investor, you know, definitely above average, but without those couple of winners. And so that's part of what you're talking about, is this, you know, that that there's, you can't expect all of them. You know, you don't hit a home run with everything. But some, some are just sitting there waiting, and then they, they take off so And last thing, just uh, compounding quality.net, that's the best place for people to go.

Pieter Slegers 19:45
Yeah, it's probably the best way to go. So that's the website. There's where, and I think that's also important. What I just do is just like you would think, you people pay a certain subscription fee that's all in and I. Just try to provide you as much value as I possibly can. And I'm also sharing my personal investment portfolio there, and a lot of people have told me, Peter, that's a very stupid idea. Why would you do that? Because by definition, every active strategy will underperform from time to time. And when you share your portfolio and underperform, well, people will be mad at you, or they think, Okay, this, this guy doesn't know what he's doing, or something like that. But I also think, well, in finance and investing, just honesty and integrity is so, so important. So I thought people have the moral right to know what you are investing in, and if I don't outperform I shouldn't charge anything for that. And I would rather I should go fishing or do something completely different. And the fact that all your money, all your own money, is invested in that portfolio, it doesn't mean by definition that the stock picks will do well. I hope they will do well, but it's a guarantee that some will be a disappointment. But what it does mean is that when a stock doesn't do well, I will be the first one to have the negative consequences as well. So just aligned incentives that's so important. Related to everything in investments, whether you choose a fund or you're investing with an asset manager, always ask him or her, Well, are you invested in the Fund yourself? Do you have all your investable assets in that company or in that fund, and that tells you so so much.

Andrew Stotz 21:23
Yeah. And one last question on your on compounding quality.net, you have our portfolio, and then you have ETF portfolio. What is the ETF portfolio?

Pieter Slegers 21:32
Yeah, I think that our portfolio speaks for itself. Individual stocks. Well, for some people, I'm not sure whether it's the same in Thailand, for example, in the US. ETF investing is very, very popular in Belgium, for example. So some people also want to have an ETF portfolio. So there, I think 98% of my money is invested in individual stocks, and then there's an ETF portfolio. And the ETF portfolio is very simple. There are just five ETFs, where I think they can outperform the market by using small factors like small caps, quality and so on. And I just add 500 USD every single month to that portfolio, but the majority of the energy, the time and so on is in the stock portfolio.

Andrew Stotz 22:14
Great. Well, 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 story leading up to then. Tell us, yeah, what happened?

Pieter Slegers 22:26
Yeah, sure, not sure. I want to share Andrew, maybe I hope that appearing in this podcast won't be my worst investment.

Andrew Stotz 22:32
No, it will. Not. Just kidding.

Pieter Slegers 22:35
No, I think my worst invest. I always say my worst investment ever, is my best investment ever. So when I was 13 years old, then I started to get interested in investing, because I just couldn't understand, how can you put money in something? And if you do well, if you put money in the right thing, in the right company, your money increases. So to me, as a 13 year old kid, it sounds like, oh, that's money without having to work for it. That's exactly what I want to do later in life. That was a bit the philosophy I had. So what happened there is, at 13, I was doing my first job as a student and get paid for that, and I needed to store shelves in the local supermarket. So I did that for two weeks, and I earned some money, and I thought, Look, I'm going to invest this money. So work two weeks there. I'm going to invest in that in Belgium. You can't open an account at the online broker under the age of 18. So I convinced my parents to open an account for me. I opened the account, very excited, and then I only had one problem. I didn't know anything about investing. I had no clue what I was doing, and had no clue which stock I should buy. So I was looking at a broker platform back then, and they had some kind of topic lists, and I wasn't out. I don't know what to do. I don't know what to do. And the week thereafter, the broker add a new company to the stock pick list. And I thought, well, those people, they probably know what they are doing, right? So I just put all my money I earned during those two weeks, which was a lot of money for me back then, into that one stock. So I probably made every mistake you could possibly make, no diversification. Had no idea what I was doing. I didn't do my own homework. I didn't even understand the company I was buying because it was active in oil and gas transportation. And on top of that, we were just before the financial crisis. So you can already, you can already guess the outcome there, I guess so I bought the stock, then the financial crisis happened, and I think after one year, I sold the stock, but I sold with a loss of 60% so minus 60% and I felt so bad about it, because. Also my parents, they said, Well, what are you going to do with investing? It's gambling. It's very risky. My grandfather, for example, said, Well, I always said, I want to do something in Investing. Investing also back then, he said, No, you won't do that. You want. You're going to be to work for the government and look into the taxes of people and do those kind of things. So that happened to me, and then my parents and my grandfather said, look what we told you. And it was very, very painful, especially since I was also quite a frugal guy, and I don't like to spend money, and also don't like to lose money. But I think when something like that happens to you, you have two options that you can take. The first one is, you say, Look, my parents and my grandfather's right, investing is risky, and I just quit, and I don't do it anymore, and I just keep all my money on a savings account, which is very stupid, I think, by the way. And the second direction you can take is just look, I made a huge mistake here. I didn't do my homework. So I'm going to learn about investing and make sure that this never happens to me again. And I think that happened to me. I should. I chose the I picked the second option, and I became completely obsessed with the stock market. So I was that investment was worse, the worst investment I've ever had, and from a percentage point of view of what you lost, but also the best one, because individual investors, people who invest in individual stocks, you will make mistakes. There's no doubt about that, but it's way better to make a mistake with a few hundreds of USD compared to 100,000 USD. So from that moment in time, I really started to digest a lot of investing books. Started to read the financial newspapers every single every single day. So I'm very grateful that I had a very painful experience, and also in general life. I think a lot of very painful experiences often form you as a person and form you as an investor, and using those painful experience to learn from and to grow from. That's something that's so powerful in every aspect of life.

Andrew Stotz 27:08
This reminds me of episode 62 Jeremy Newsome, and that was back in 2019 and Jeremy was a young man, and he's his dad. He convinced his dad to give him some money. He put it in the market, and he invested in Apple, and it went up, and they made good money out of it. And so his first trade was strongly profitable. Then is he started getting interested in nickel, and he asked his dad again for money. Since they'd done so well, his dad gave money. He went into the market. He bought nickel. He, as he said, 15 minutes from the peak, and then it proceeded to crash. But he didn't buy nickel. He bought a derivative instrument that went to zero, yeah, in his second trade. But to make matters worse, the money that his father had given him was 100% of his retirement savings, yeah. And then you realize, like, Okay, I think your situation is beautiful in the sense that, you know, yet you had your confidence. You went in there, you got knocked down, you know, and it was a wake up call, but it was only with a small amount of money, and therefore, and you know, it's only you and your pride that got hurt. Yeah,

Pieter Slegers 28:31
exactly, exactly. And that's also one small extra story I have there, and I love the story of your friend, by the way, as well. When I joined the industry, the asset management industry. I was, I read everything I you possibly could about buffet and Munger, and you know the statistics, 90% of all investors underperform the markets do worse than the markets. But I was still a bit naive and a bit arrogant. Probably back then, I thought, well, I'm different. I will show those guys how it's done, and I will try to use Buffett's philosophy and outperformed that way. And what was a real aha moment for me was when I was at the Goldman Sachs headquarters in London, and I was sitting in the room listening to some CEOs speaking. But there were 1000s of professional investors, there 1000s fund managers, analysts and so on. And I was looking in the room, and I thought, look statistically, 900 out of those 1000 people here will do worse than the market, and this while we are all working very hard, all very ambitious. Most of them are quite smart, way smarter than I am. So that was something. What would make me different? Why could I do better than 90% of the guys in this room. It made me afraid, but I think the answer there is a lot of people on Wall Street are playing the short term game, and it's a bit like Charlie Munger. He was a huge fan of checklists. So what you can do, and what you try to do, is you try to use a checklist to try and be as. Nationals as you possibly can as an investor, and within that checklist you or use all you lose multiple criteria that have proven that in the long term, they tend to outperform the market, like companies, where we already talked about that, companies with a high return on invested capital tend to outperform companies with skin in the game as well, where the founder is still involved in the company. This is a Harvard Business Review study that states, well, those companies do 4% per year on average, better than the market. I think this makes complete sense, because from a gut feeling, well, when this founder has still all his money in the company, well, the incentives are aligned, so he also thinks in the long term, and you're combining all those criteria that makes sense from a gut feeling and are very intuitive, and that way you can hopefully build, yeah, a watch list and over time, a portfolio that hopefully does better than the market.

Andrew Stotz 30:55
So here's the question for you, let's think about parents. You know, young parents who have a kid, and they come to them and say, I want to try to invest in the stock market. And, you know, they decide they're going to help them open an account and they're going to let them do it. What advice would you have for those parents to make sure that the experience, you know, is valuable?

Pieter Slegers 31:19
Yeah, I would say two pieces of advice. One is let them be and let them do their thing and let them make their mistakes, because it's a certainty that they will make mistakes, but those mistakes will be painful, but also a very great learning school. So I think that's so powerful in life, when you make costing mistakes early in your life or your career. And the second point, I would probably say, is especially when they are still very young, and maybe they can't invest from themselves yet, let them invest in companies that they understand, companies that they use in their daily lives. I'm just saying something like, everyone knows. Our kids know Netflix, they know McDonald's, they know Coca Cola and so on. And to me, I don't have kids yet. Hopefully I will one day, but when I would invest for my kids, it wouldn't be the most important for me to have to generate the highest returns from them, but just make them familiar with the stock market. And when you invest in Coca Cola for them, that's very easy. Every time your son or daughter drinks a Coke, you can say, Look, you may be a very, very small piece of this Coca Cola. That's part of you, and you're earning some money because of that. And when you watch Netflix, you can tell the different the same story. And when you go to a Walmart, for example, look, look, this brick, this brick of this store, that's yours, because you are a very small, for a very small percentage, the owner of all the Walmarts in the world. And hopefully that way they get a bit more excited and interested in investing. So, so that's what I would do personally.

Andrew Stotz 32:57
Yeah. In fact, Coke's an interesting one, because for every $100 that they bring in of product revenue, 27 goes to net profit. Yeah, incredible, incredible numbers. So what's a resource that you'd recommend for our listeners, either of your own resources or anything else.

Pieter Slegers 33:16
Yeah, it's always feels weird to obviously mention yourself. I think there are multiple things and we discussed before we recorded Andrew, just reading as much as you possibly can is such a gift. So that's also about trying to do with compounding quality. So last year, I read 84 books. This year, yeah, I just started my 61st book of the year. And

Andrew Stotz 33:41
is there any, is there any book that stands out that you really res, that really resonated with you more than another one? Or how do you feel about that?

Pieter Slegers 33:49
Yeah, a lot of people ask me that question. I think it's a very difficult one, because you I just try to read a lot of different subjects, and also the stories of founders and so on, and after a while, everything starts to connect and starts to click with each other. So doing it, yeah, regularly is so important for example, I always also read multiple books at the same time. Right now, I'm reading Elon Musk biography, the innovators dilemma, the four hour work week, the book of Alex Morris about Buffett and Munger and scripted so reading all those kind of things at the same time is so interesting. But I would say one investment book that really clicked with me recently, that thought was phenomenally written, is what I learned about investing. I think that's a unique insight about the stock market. Who is what I learned about investing from Darwin, I think it's from pulak Prasad. On top of finance, it's an amazing book. I'm lucky that I love to read, but I also say that I have the moral obligation towards readers of compounding quality as well, to keep learning and keep exploring. Exploring. So that's what I try to do, via compounding quality as well. Look, this is my passion. I will spend 8090 hours a week on this. I will keep learning, keep exploring, and I try to digest everything for you and send it out to you in a very digestible way, via compounding quality. For those who want don't want to read 80 or 90 books a year themselves, or read the 10k a day, because that's also something I started doing two years ago, I guess. And it's all there, you we know the power of compound interest, but what's really important is knowledge compounds too. So that's important that everything in life compounds, as a matter of fact, my signature and my email knowledge compounds your network, compounds your money compounds, hopefully, your health compounds too. So everything in life compounds, amen.

Andrew Stotz 35:51
Well, just for the listeners out there, the book is what I learned about investing from Darwin, and it's pulak Prasad. It's got 4.7 out of five on Amazon, with 1000 reviews and 4.6 on Goodreads, which is exceptionally high. So that's a good one. I'll have a link in the show notes. In fact, I was always asked by people, what are my favorite books on investing and what I'll list them out in order. And I created a course where I did a course on each one of these books. And the first one is the theory of investment value by John burr Williams, where he talked about the dividend discount model. The second one was the Intelligent Investor. Third one was A Random Walk Down Wall Street. The fourth one was one up on Wall Street. And then the fifth one was a little book that beat the market, which was Joel Greenblatt, which he's supposed to come out with a new one, but I'm waiting for that. Then it was William Green with Richard wiser, happier, which was an amazing book. I highly recommend it. He was also episode 563, and then there's the education of a value investor, 100 baggers. Those are some of the ones that were interesting to me. So yeah, the books are just incredible. So what a great, what a great experience. Let me ask you the next question is, what is your number one goal for the next 12 months?

Pieter Slegers 37:12
Sure, and before I forget, I will, I forgot to mention that, but I will also send you a copy of The Art of quality investing. It's something la Cruz and a friend of mine and I worked on. So hopefully you will like that as well. Well, what am I working about on, on the next 12 months, more of the same in general. So keep learning. Keep reading. Keep reading the 10 Ks. Keep reading books, listening to podcasts and so on. So doing that. And one thing that I'm noticing with compounding quality, and that's the same with Warren Buffett, we talked about it, and the same with other great investors, like Charlie Munger, Terry Smith and so on. What you see all the time is, during the beginning of their career, their outperformance is ridiculously high, and then because they become more successful and well known, their assets under management increase and that our performance is still there, but it goes down and down and down and down. And unfortunately, I'm experiencing something similar with compounding quality, because so many people read it when I write about the company, often it influences the stock prices. So last week, I published something about computer modeling group. It's a CLI choir where constellation software, some people of constellation software are involved. It increased 7% because I published an article when last time, when I wrote something about churches scientific it was up 10% so that's something that's tricky, and that's also a pity, because, as we discussed, the differences are made in the small cap space. So now, probably in September, I want to do something very exclusive for a limited amount of people to do the quality investing philosophy on, yeah, on small caps and micro caps, probably only 200 people will be allowed to read it and to join because otherwise we will have the effect on the stock prices once again, and that will be called a tiny Titan. So I'm really looking forward to that, because I'm a true believer that just if you do your homework in the smaller market cap space, there are so many companies that look so great, and also the valuation is way cheaper because they are not well known yet. And hopefully the goal is to find some of those smaller micro caps that, over time, become a large cap, and then you have a double edged thing in the positive sense, meaning they are creating their they're increasing their intrinsic value, but all but also, yeah, their multiple can go, can double or triple just because they're so cheap, and when the institutional investors start to buy it, that also has a positive effect for the valuation. And that's how most of the multi baggers are created. You talked about the book, 100 baggers for Chris Mayer. Well, that's the secret of the multi baggers, high growth, high intrinsic value per share growth in combination with most. Multiple expansion, yeah, then you get a Yeah, a compound effect as well there,

Andrew Stotz 40:05
yes. And Chris Mayer was episode 249, and he talked about building a list of five quality companies and wait to the next market fall. Well, listeners, there you have it. Another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. And as we conclude, Peter, I want to thank you again for joining this 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?

Pieter Slegers 40:37
No, I just want to generally thank everyone for following, and hopefully you had some fun. And I think everyone listening, it's also amazing what Andrew was doing. So please also give him a hand or send him an email or support him in any way you can. So I had a lovely time, and for if people have questions for me, always happy to help via combining quality.

Andrew Stotz 40:57
Fantastic. I love the name compounding quality. That's what we want to be doing in our lives. 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. You.

Andrew Stotz 00:01
Fellow risk takers, this is your worst podcast host. In fact, I just saw some person, or a couple of people, published an episode of the show called the worst, and so I had to somewhat one of my friends and former guests, Frank, basically put a note. Wait a minute. You can't be the worst. Andrew is the worst. So the fight didn't last long. I triumphed. I'm still the worst. Andrew Stotz, from a Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story in Episode 645, Larry stands out because he bridges both the academic research world and practical investing. Now today we're diving into a chapter from his recent book, enrich your future, the keys to successful investing. And specifically we're talking about chapter 40 the big rocks, Larry, take it away.

Larry Swedroe 00:58
Yeah, thank you, Andrew, good to be back. So like all the other chapters in the book, this one begins with a story that we use to as an analogy to help understand a financial issue in this one, it's a story I read about where a professor in time management talked to a bunch of doctoral students, and she brings out a beaker and fills it up with some big rocks. And then when she couldn't get any more big rocks in, she asked the class, is the jar filled? And some couple of people shout out, yes. And she says, Oh, really. She pulls out from under the desk a bunch of smaller rocks, and starts to fill in the spaces between the big rocks until no more small rocks could fit in. And she then asks the class, is the jar now fill? And the class kind of says, not really. And so she says, That's right. She pulls out a box of sand and pours the sand in and sprinkles it until no more sand could fill and then she asked one more time, is the jar now filled? And the class says no, and says, that's good. And she pulls out a glass of water, fills it up until no more water would fill in. She then asked the class, so what's the moral of the story? And one bright, eager student jumps up and says, no matter how busy your calendar is, you can always fit in one more meeting after the laughter dies down. Says, that's not really the message, of course, the message is, if you don't put the big rocks in first, you could never put them in right and so she said, the question then is, what are the big rocks in your life? And is it trying to outperform the market or spending time with your family, et cetera. And we looked at all of the evidence. And if you put in all this time trying to beat the market, trying to outperform, professionals who are spending all of their time have a lot more access to data, as well as all of the training, et cetera, the odds are your app perform them are asymptotically close to zero. They're not zero. But especially after taxes, it's so low that it's not prudent to try. And as my Bucha co published, or co authored with Andrew burkin, The Incredible Shrinking Alpha shows it's getting harder and harder to outperform over time, it was about 20% of professionals. Professionals were outperforming back in 1998 when I wrote my first book about 13 years later, it was down to 2% even before taxes and 1% after, and it's gotten even harder ever since. So that raises the question, you know, what are the big rocks? What's important? And so I told the story in the book, which is a true story happened with me. It happened a bit after my first book was published in 98 I got a call from a doctor who relayed this story to me. It was in the late 90s, of course, and a lot of his friends doctors and doctors, as it turns out, if you ask most investment advisors, they will tell you that doctors are the worst investors because they confuse intelligence with wisdom, and because they're obviously a highly intelligent individuals. You can't get through med school and not be intelligent, then you could apply that intelligence and make you know, outperform the market. Whenever I'm I hear that. From a doctor, I always tell them, Well, I graduated number one from my MBA program. Would you let me operate on your patients? And they laugh, and I said, Well, why do you think you can use your intelligence to outperform when you have no training and investment I bet you haven't even take a single course in capital markets theory, and you get a duh kind of answer, right? So the doctor went on to tell me the story that a bunch of his friends had been making a lot of money, outperforming the market, buying these stocks that related to medicine they were researching. So he decided he ought to do it. So after coming in, after putting in maybe an 80 hour week, he'd come home go to his computer instead of sitting down to a dinner with his wife, read a book to his new baby, you know, it's new child, and spend hours researching, looking at the charts, listen to videos and all this stuff, reading blogs. And very quickly, it turned a small investment, he said, into 100 grand. The problem was he no longer had a wife, no longer was a father to his child. You know, no one got divorced at this point, but he was spending no time with his family, and his family was not happy about it. The good news was he actually, over the next several months, lost the entire 100 grand. And if someone who had read my book recommended he read my first book, the only God you'll ever need to winning investment strategy, he read it and figured out why he was playing the losers game, not the winners game, and he was one of those losers, both in investing and in the game of life, because he was focusing on the little rocks, the sand, the water and the pebbles, not the important things, his wife, his family, etc. So he after reading my book, he gave all that up, and now we had much more time to spend with the family, so now he said he was playing the winners game in life and investing. And of course, that made my day. No authors generally get rich from writing books on investing, unless you're Warren Buffett, he's already rich, or John Bogle or somebody like that. And then there was one other story I added, because it really resonated. I was introduced to a fellow who was the assistant treasurer of Anheuser Busch and in charge of their pension investments, and they were actively picking money managers in each asset class, reviewing performance and shifting every few years based on past performance. And I went and explained to him our strategy and showed him the evidence that that strategy didn't work. Past performance is not a good predictor, and it all resonated with him, and he decided to become a client of my firm. Months later, I met with him, and we're talking about how things are going. His wife was with him. Said, never mind how things are going from the investment side. Rick was his name is now spending. We count. She counted. It was 50 hours a week that, you know, he was spending, you know, sorry, 10 hours a week he was spending, previously on investing. Now, when he came home, couple hours a night during the week and stuff that he no longer was doing, he was now spending with his wife. So you multiply that I was 500 hours a year he had recaptured to spend on big rocks instead of reading barons and watching Wall Street week and reading the journal or whatever, which is really nothing more than the sand the gravel and no small pebble. So that, again, made my day, because helping somebody improve the quality of life is much more important. I think that's really the big rocks in our lives.

Andrew Stotz 09:08
There's that. There's a couple things you mentioned it where you said one line, luckily he lost all his profits within a few months, which, on the face of it, you would say, is not lucky, but it woke him up that he got back his family and his relationships.

Larry Swedroe 09:22
I have another story related to that, which is worth repeating, because this fellow eventually came to work for Buckingham, I'll tell you the story, and then he left and formed his own firm. And now the firm is called Hill investment groups, or anyone wants to go look it up. It's a large RIA on its own. And Rick Hill, someone had given him my book. He was working at some brokerage firm or something like that, and he read my book and said, Hey, this is the right way to invest. He came and applied. For a job we had just started out. We gave him a really low level job. That's all we had open at the time. But he would take anything just to get and to play the right game. And over lunch one day, he told me he had bought some high tech stock. Now this is like 99 All right, maybe it might have been early, 2000 somewhere around there. And I said to him, the worst thing that can happen to you is you'll make money on this, because then you'll confuse luck and skill. The best thing that can happen to you is it'll crash and you'll stop doing that. So I said, at the very least, set a stop loss, so if it does crash, you don't lose all of your money. Sure enough, as it turned out, lucky for him, the stock crashed. That may have been around March 2000 or somewhere around there, stock crashed, and he stopped picking stocks. Never bought another individual one, as far as I know, and then went on to a career as an advisor and formed his own firm, etc. So he found the winners game in both life and investing for his clients.

Andrew Stotz 11:12
There's another quote which is great in this, which is you quote from Paul Samuelson, and he said you shouldn't spend much time on your investments. They will that will just tempt you to pull up your plants and see how the roots are doing, and that's bad for the roots.

11:30
I love that. One

Andrew Stotz 11:32
of my favorite for sure. And then final pieces of advice out of this, I think really, really can help people who really are inclined to trade, and that is, you say, if you find that you need excitement from your investments, you should set up a special entertainment account. The assets inside that account should not exceed more than a few percent of your total portfolio. Invest the rest of your money in what I believe to be the winner's game. And I think that that is actually a very good solution for people who do feel like I got a trade,

Larry Swedroe 12:04
yeah. So you know, there are people who know they shouldn't take their IRA count to the racetrack or the casinos in Las Vegas or Macau, wherever they are, right? So, but they're willing to go and take $100 or 500 or 1000 consider an entertainment. If they blow it, they blow it, and the odds are they'll likely will blow it, because the odds are stacked against them, and they make the mistake when they're ahead, they keep playing, because it's playing with the house's money when it's their money. And you could quit at any time, but the house counts on it, and when they're behind, even though the odds, you know they'll lose more money if they play, they're trying to break even, so they just playing whether they're ahead or behind, and the more you play, the more the odds favor the house, right, right? So, but they go to the racetrack anyway, even though the house takes 17% or so in the US, and they buy lottery tickets where the house, the state and US takes 50% of the money. But that's okay. They understand the entertainment. They go to Casino. Maybe they enjoy watching people. They get the thrill of drawing to an inside street or whatever. But they don't lose their investment retirement money.

Andrew Stotz 13:25
Yeah, as we speak, my best friend Dale, who runs our coffee business, is in Cleveland, Ohio, in the one hotel that is right next to or has a casino in it, and he's there, he took a limited amount of money, and he's having a blast and but he takes a limited amount of money and he he's pretty convinced that he leaves a winner. You know, most of the time I

Larry Swedroe 13:47
should make sure he keeps a diary and actually write it down. I used to go to the casinos in Lake Tahoe. This is now 50 years ago, and when you had $2 tables at blackjack, and I would play. And those days, you were often facing like two or three deck hands so you could count cards, and I would knew which hands to draw on which, and knew when to double down, because the deck was stacked with more high cards, and I could, usually my rule was the 20 bucks or two hours. So if I was up at two hours, I was walking away. And, you know, sometimes I'd lose in 20 minutes, and sometimes I'd last two hours. But I had a little bit of fun testing my skill and stuff. And you could see the dealer laughing and smiling because he knew what, and he would let me do it because, you know, I wasn't betting 1000s that, you know, yeah, in which they would have kicked me off the tables then, or broken my leg.

Andrew Stotz 14:56
And just one last thing is, you mentioned about Doctor you had restored. Worry about Doctor. And for those people who are doctors, go to Episode 746, and you can listen to me talk to James Donnelly, who wrote the book The white coat investor. And that. There it is. And

Larry Swedroe 15:11
you see, this is how I learned how you could beat the deal. So by Ed Thorpe, yeah, he's the guy who broke the bank in Las Vegas, beat

Andrew Stotz 15:21
the dealer, a winning strategy. Man, that's amazing. So

Larry Swedroe 15:26
read his book and learned how to, you know, play blackjack at least put now, of course, you got five deck hands, and they shuffle it halfway through, and, you know, it's much harder to win. And they've got spy glasses, are looking down and all this

Andrew Stotz 15:42
stuff. Um, there's a great interview by Tim Ferriss on the Tim Ferriss show of Ed Thorpe. And I really, really enjoyed that. Just hearing,

Larry Swedroe 15:49
hearing a great movie about that, what was the name of that? I can't remember. I can't remember, but it was a great story.

Andrew Stotz 15:57
Speaking of that, you gave a great recommendation to me, and I'll mention it, which was, what was it? Department? Q, yeah. And as you said, the first few Are you enjoying it? Yeah, the first few episodes, you said, it starts a little slow, and it certainly makes you think that boy, Scottish people are just mad, angry, mean people, but maybe it was just the people who are in the but, yeah. But it did take a while. But

Larry Swedroe 16:22
the story is very clever, and the lead is really good,

Andrew Stotz 16:26
yeah, and you can see that they got a lot of room to bring new episodes of that, you know, a new series like that. So that was a good one, exactly. So anyways, let's now talk about we're going to wrap up. So I appreciate you know this story. I think it was great, and this chapter helps us, and we are now next going to discuss Chapter 41 in our next episode, not right now. And that is a tale of two strategies for listeners out there who want to keep up with all that Larry is doing, follow them on Twitter or x at Larry swedroe. Follow him also on LinkedIn, but most importantly, get his sub stack. In fact, you'll get book recommendations and what was the latest one I just saw and I went, I read. I read through it. I can't remember what it was, but my I'm a senior moment, but I read every one of yours that come in on sub stacks. So I highly recommend that people do that. So this is your worst podcast host, Andrew Stotz saying, I'll see you on the upside. You.

Andrew Stotz 00:01
Andrew, fellow risk takers, this is your worst podcast host Andrew Stotz from AE Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was the head of Research at Bucha and wealth partners. You can learn more about his story at episode 645, now, Larry stands out because he bridges both the academic and research world and as well as practical investing. Today we're diving into a chapter from his recent book, enrich your future the keys to successful investing. Specifically, we're going to be talking about chapter 39 enough. Larry, take it away.

Larry Swedroe 00:31
Yeah. So this story begins like all the chapters in my book, with a story about an incident, and then I relate it to investing. And the story is one that I read about where Kurt Vonnegut is meeting with his friend Joe Heller, who had invited him to some party of some billionaire out on Long Island, Shelter Island, I think it was. And he's they're walking around in this magnificent estate with tennis courts and pools everything and Heller says to Vonnegut. He says, Kurt, Doesn't it bother you that this guy just, you know, trading on Wall Street doesn't contribute anything to society. You Yeah, so much more than you'll ever make from your best selling, award winning books. And Vonnegut says, No, because I have something he doesn't have and will never have. And hella says, What could that be? Says the knowledge that I have enough, that's an issue that I've always talked to investors about about separating desires from needs. And the interesting story is there's a whole body of research several years ago that looked at happiness factors around the globe. And it turns out that no matter where you live, could be on vanitu Island or Fairbanks Alaska or, you know, out of Mongolia, there's a level of income at which above there people are not any happier. Okay, so the utility of wealth curve looks sort of like an elephant from the side. It goes way up quickly, because when you have nothing, a little bit really improves your life. If you're homeless and someone gives you 25 bucks to go take a shower, get a meal and stuff, boy, that really made you much better off. But once you get to some level of net worth, call it 2 million or 3 million, or whatever the number is for you, you're really, you know, the extra wealth is better than less, but what it does to your incremental level of happiness, just like the elephant's back, flattens out, there's really virtually little or no improvement in your state of well being and happiness. And it turns out that, of course, the number or of income level is different. In Hope, Arkansas, it might be 60,000 a year. In Manhattan, it might be 160,000 a year. And in Thailand, might be 30,000 a year. But once you're above that level, and assuming you have your health right and you know and stuff, it doesn't matter how much your income is. And so the problem is people keep trying to get more, and they take on lots of risk when it may not improve their level of happiness. And therefore they don't need to take so much risk. They can dial down the risk in their portfolio and be much happier, sleep better and not worry about markets and enjoy their life.

Andrew Stotz 04:00
You know, I do. First thing I took out of this is something that I always say to people, because a lot of young people say, I want to get rich in the stock market. And I say, look at the richest people in the world. They're business owners. You know, it's not like, you know, the 500 you know, 500 people on the Forbes 500 list are all stock traders. And I say, Well, they say, Well, look at Warren Buffett, or, you know, George Soros. And I say, Well, you know, they definitely there. There's an angle of that. In the case of Warren Buffett, he's, he's really an investor in businesses. So Warren Berkshire Hathaway is a collection of businesses. If you look at some of these other guys, they've started hedge funds, which are some of the most profitable businesses in the world. And that's a big part. Now, sure they had some good trades and that gave them the money to start those businesses, but that's the first thing I was thinking about when I was reading it. What are your thoughts on that, as far as people thinking that they could get rich in the stock

Larry Swedroe 04:50
market? Well, first of all, I would say there are a far bigger list of people who have built businesses, et cetera. The second thing and more important. Certainly, perhaps, is, I would tell them to look in the mirror and see if they see Warren Buffett or George Soros. That'll answer that question pretty quick. But the most important thing, I think, is that you have to understand that the strategy to get rich, which is to take rich, in some cases, whether it's running a business or investing in the market, but once you have enough, whatever that level is, the strategy to stay rich is entirely different. It's to minimize the risks you need to take while still allowing yourself enough risk in the portfolio to maintain a lifestyle that meets your needs, not your desires. And when you turn needs into our desires into needs, like a woman needs 200 pairs of shoes, or the guy needs a Rolex watch, well now you have to take more risk, and now you may end up eating cat food when you were perfectly well off in the first place.

Andrew Stotz 06:01
And another, another sentence that I read that I just, you know, it made me think a lot was a great irony, is that the very people who have the most ability and willingness to take risks have the least need to take it. And so what you see in that is that the reason why they're taking it, you know, is, is a couple of reasons. Obviously, you talk about their confidence, you know. And when you're successful in business, you build up a confidence level that you can sometimes take in, you will take in pretty much every other area. And so that's one thing I see. It's like a confidence spillover, that you think you should be confident in another area just because you've been successful in one. And I've seen many business owners that sold their businesses, had money and then lost a huge proportion of it because they applied their same level of confidence to investing, and they thought that this is that, you know, their time has come. They got the cash now it's time to really beat the markets, and then all of a sudden they destroy themselves. So that's the one thing I wonder, you know, and you mentioned about having a couple that you met or advised that had went down to 3 million. Maybe you could tell that story, and that would be interesting.

Larry Swedroe 07:07
I was just going to tell that story and wrap this up. I thought so. In 2003 I was consultant to a large investment management firm up in Rochester, Minnesota, where the Mayo Clinic is. Of course, lots of doctors and stuff are there. And I was asked to meet with this couple individually the morning before I was going to give my talk, because they were in what they felt was a desperate situation. And I sat down with them, and here was a couple. We started off trying to get to know them. The guy was, my memory serves, 71 years old at the time, and he had bragged to me that he had worked for 50 years running some business, I think it was a dental practice, manufacturing devices or something, or medical devices anyway, and he had never taken more than like one week vacation in a year, which, you know, I thought was not a good way to live a life when you had made all this money and they Were still sitting with $3 million which I asked them, how much they spent a year, if you work 51 weeks a year, probably not spending a lot of money on vacations and stuff. And they said they never spent more than 100 grand a year. I said, Well, you're in perfectly good shape with a well diversified portfolio. You counting your Social Security, you're going to take out less than 3% a year, and that's you know, you could sit in totally safe treasury bonds and meet that requirement. The problem was, I knew that just three years before, they had had 13 million, and I said to them, if you're only spending 100 grand a year, you clearly didn't need to take any risk. You could have put all your money, or most of it, in a safe portfolio. Why did you take all that risk? Because you had to understand that while you had the opportunity, let's say, to double your money to 26 million, there was the risk it could go down. Right? Would your life have changed in any meaningful way if you had doubled your money instead of losing and he said, No. And I said, you know, well, the obvious answer is you shouldn't have taken the risk. And what was really sad. Their broker had had them all in high tech stocks, which is how he could have collapsed 70% the market is 6040, portfolio was probably down like 30 something like that, which would have meant he still would have had maybe nine or 10 million, not just three. You. Uh so. And I said to him, said, if you knew that could happen, why did you take the risk? And the wife turned to him, punched him hard in the arm and said, I told you. So. You know, I felt bad for this couple. But what better lesson than to understand that when you have enough it's time to take the chips off the table, and

Andrew Stotz 10:20
they are so lucky to be at 3 million. You know, I have a friend of mine who is a businessman, and he sold his business. Made good money from the sale of his business, but he started investing through somebody that basically lost almost all of his money. And he's now, you know, 75 and I just talked to him yesterday, and he's basically living off of his girlfriend. At

Larry Swedroe 10:48
least he's got a girlfriend he can live. He's

Andrew Stotz 10:50
lucky, very, very lucky. I mean, he is a good and sincere man, and, you know, he made a huge mistake, and he didn't end up with 3 million and so I think the lesson that I want to, you know, take away from this too, is this idea that it's not easy if you're a businessman or woman who's used to taking risk and and used to seeing it through those risks and building something great in your business and all that, it's not easy to to think, how Do I reduce the risk in my investment portfolio because you want to. You're naturally a risk taker, and that's the hardest part, you know? Yeah,

Larry Swedroe 11:27
well, the real problem is his lack of financial literacy. If he had financial literacy and read, for example, my books, that situation never would have happened. He would not have allowed some stock broker to exploit him and put him in highly risky assets. He would have known better if he'd read my book. You're a complete guide to a successful and secure retirement. Wouldn't be in that that's the sad reality that people spend far more time watching reality TV shows than they do investing in their own financial

Andrew Stotz 12:02
education. I mean, I would just push back on that, because I do agree that you know education and the key is, you know, and you what you've been teaching through your writing is fantastic. But there's I would tell you, my friend probably read all those books, and he still did it.

Larry Swedroe 12:17
I'll take that bet. I bet he hasn't read a single one of those books. Okay, so let's find out on our next call. We'll see who won the

Andrew Stotz 12:26
bet. Let's do that. Fantastic. All right, you can still be

Larry Swedroe 12:30
right. I know people who have read my books who still go on to make dumb mistakes because they think they're smarter. Yeah,

Andrew Stotz 12:39
I got my homework now I'm, I'm after digging. He may not like it if I ask him a lot of that question, because it's so painful. It is very painful, you know. And it's a reason why this episode is so important, you know? I'd say, So, yep. Um, well, that's why

Larry Swedroe 12:53
we're here, is to help other people and prevent them from making those mistakes, yeah. And

Andrew Stotz 12:58
that's what I when. I always say, when I open up my worst investment in ever podcast, I always say, you know that I'm on a mission to help a million people reduce risk in their lives, and this is one of those discussions. So I want to thank you for this great discussion. And also, I'm looking forward to the next chapter, which is chapter 40, the big rocks, not the big rock and roll, the big rocks. And for listeners out there, we want to keep up with all that Larry's doing, first subscribe to his sub stack and otherwise go to Twitter at Larry swedroe, or you can see him on LinkedIn, and this is your worst podcast host, Andrew Stotz saying, I'll see you on the upside you.

Andrew Stotz 00:01
Hello fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know this. To win in 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, and I want to thank especially my listeners in Northern California for joining fellow risk takers. This is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Blair on the court. Blair, are you ready to join the mission?

Blair Lacorte 00:37
I'm ready. I'm excited to be here. Yeah, and

Andrew Stotz 00:41
you see my, my competitive advantage is my, my podcast voice, you'll see me switch around, but for right now, I'm going to stay in my Jim Carrey, exaggerated podcast voice, so let me introduce you to the audience. Blair is a dynamic executive with experience across entertainment, aviation, AI, aerospace consulting and more. He's held CEO roles at companies like PRG, EXO jet and Autodesk, and led startups to IPOs. Currently, he's training as an astronaut for Virgin Galactic and vice chairman at the Buck Institute, Blair, take a minute and tell us about the unique value you are bringing to this wonderful world.

Blair Lacorte 01:29
Well, I think I'm perfect for the show, because, you know, I've had a lot of disasters in my career, and I truly appreciate the topic, because I believe that at the end of the day, you know, sometimes you're learning and sometimes you're earning, but you never earn unless you learn, and you never learn unless you fail. So anyone who doesn't actually have failures is either lying to you or they're a poser. So I, you know, I think this is, it's a great way to approach, you know what business is, which is, you know, getting better every day. It's an apprentice sport. Very few people, yeah, win at business on their first day out.

Andrew Stotz 02:09
That's true. And one of the responses I had from a guy that I reached out to asked to come on the show. I asked him to come on, and he said, I said, I want you to share the story of your worst investment ever. And he said, not my style. Thanks.

Blair Lacorte 02:26
That's okay, you know,

Andrew Stotz 02:28
I said, that's no problem. So anyways, so tell us about what you're doing right now. You know, you mentioned we've got some good, you know, background of what you've done in the past. You're talking about training. You're also talking about, you know, helping CEOs. You've got the Bucha Institute. What are the things that got you excited right now?

Blair Lacorte 02:47
So, you know, two years ago, I decided to transition out of I had taken a company public in the autonomous vehicle business and defense autonomy weapons business. And I said, you know, if I could do anything I wanted to do. I would do what. And so I picked three things. One was, I picked the Kroc Institute, which is for people who don't know, it's out of Purdue. We do most of the strategy for America on business strategy with our competitors around the world. So we brief many agencies on, you know, what the impact of business is on our national security? The second was the Buck Institute, which is the number one Institute in longevity in the world, and that's right up the street for me. And so I spent, I'm spending some time there. And the third is, I just, I'm coaching. You know, I was a youth coach for 20 years. My dad was a coach and, you know, and all the businesses that I've been in, when you change industries, I've been in eight different industries. In reality, I'm not bringing the content, I'm bringing the process, and I'm bringing the leadership, and which means I need to be able to help people help me. So those were the three big things I do today.

Andrew Stotz 04:03
And how do you break How do you break up your time? Between those three things,

Blair Lacorte 04:06
probably spend about 50% of my time on the coaching business, just because, with 50 CEOs globally, they come into town four times a year, and then we have monthly calls. You know, there's always something interesting. You know, one of the things is, I probably have 35 different industries, so every day, when I'm talking to someone, they're challenging me to understand, you know, what is it like to run a dating site and in Germany, compared to, you know, running a construction company for stadiums in the US, compared to even things like, what is it like to build, you know, portable parties, high end, portable bodies being the number two person in in the US and each of them have their idiosyncrasies, but reality is that they all come down to people and patterns. So every day, I get to be challenged. What

Andrew Stotz 04:57
do you mean by people in patterns? Yeah. So

Blair Lacorte 05:01
one of my most defining experiences was when I first got into high tech. I was in high tech for the first third of my career. Unfortunately, I made a mistake. I thought I was joining Sun oil. I joined Sun Microsystems. Little beneath to me, the head of strategy at General Electric and his counterpart had put me in and to be head of strategy for a big tech company. I almost quit after the first week, and a guy named Eric Schmidt, who went on to have Google fame, but at the time, was the head of R and D for first son, came to me. He said, listen to me. You may not know technology, but no technology gets built without people. And what I realized in that moment is that business is just like a sport, and if you can't manage the players, it doesn't matter the skills or the or the game plan. And then, you know, the second piece is just that every business has patterns, and understanding those patterns and challenging your players to be able to explain to you how they're optimizing them is really how you make players better, right? So my, that's, that's my, you know, I know that if you looked at each of the businesses I've been in, you say they're very, very different, running the world's largest live entertainment company versus the world's largest, you know, private airline, you know, versus the largest hardware company in tech, sound very different, but they're absolutely related to each other, right? It's, you know, we're just playing around with how we put people in the right positions and what patterns we're testing.

Andrew Stotz 06:35
You know, I just wrote this latest redid the chapter in my evaluation masterclass, and I did a lot of research on Tom Malone, who came up with the idea of EBITDA. We talked a little bit about this before we turned on the camera. But I, in that process, I tried to get as many videos as I could of him, you know, and watch and see what he's like. But I watched one just recently, you know, last year, I think it was, he was 80 something, and he was just talking about how, when, when you're not running the company as a CEO, you're on the board, or you're an advisor. He said, You're, it's like pushing a string, you know, you can't really make the impact that you can as a CEO. And it was, like, it was so fascinating to watch this 80 year old guy acting like he wants to get back in the ring. And I'm curious, like, what's, what's what? How has your life changed as you've gone through different stages of where you are with coaching versus the idea of being in the ring?

Blair Lacorte 07:29
Listen, it's a really insightful question. So, you know, at I'm getting a little bit older, so I can have you know, as you look, look back in time, look, being on a board sounds very prestigious. I've been in on probably over 30 or 40 boards in my career. The problem with being on a board is, especially a public board, is you're there to limit risk, right? So you're not there to run the business. You're there to help them, you know, have fiduciary duty and to limit risk, and you are there to try to help coach the CEO, but you're not there to tell the CEO what to do. So it is a completely different job than you would think it is. The only real power you have is getting rid of the CEO. And if you're getting rid of the CEO, the company's in big trouble, right? To make that kind of change. So I did not actually, you know, want to go when I I stepped back from being a CEO, I did not want to go on too many boards. I actually try to do a more active form of coaching, which is, we have an agreement upfront that I am going to challenge you, and I'm going to challenge you on business topics, not just on personal coaching and the politics of the job. And so I think you know, thus far, it's been fun for me, but you have to have a close enough relationship with the CEO that at the end of the day, after you're done challenging them, you can take a deep breath and you can go to bed that night and not worry what's going to happen the next day, because it's, it's the player on the field. So I, you know, I found a happy medium for now, but you always miss if you were, if you're a player. You always miss being on the field with your team and figuring out how to do something and pulling out that big win. But you know, at a certain age, you know the what you have to do to be a CEO is not necessarily a great trade off.

Andrew Stotz 09:19
Yeah, it's a good it's a young man sport in the sense,

Blair Lacorte 09:23
although I know you're a CEO today and a coach, so you're, you're, you're walking that fine line,

Andrew Stotz 09:29
yeah. And one, one of the things that when my best friend Dale came to Thailand, we started our coffee business here, coffee works, which is a B to B coffee roaster. He's the guy that ran it while I was working as an investment banker. So we started our, you know, business with, you know, a 5050, relationship in the ownership, but with him running the company. And he's run it for 30 years the way he wants to run it. But therefore, I've always been an advisor to him and the manager. Team, rather than, you know, the man out there doing it. So it always made me thoughtful about the type of advice I would give, how hard I would push at times, and that, you know. And so when I was listening to Tom Malone, I was thinking about how, yeah, it is pushing a string. And he said, even if you own a large part of the company, you're still pushing a string. Because ultimately, you can't tell people what to do. And even if I did tell people what to do, it's not to say that what I'm saying to do is the right thing to do. And so I really related to that. And so that's how I've really, you know, managed that business to that extent.

Blair Lacorte 10:34
And you and you'd relate to this. You know, early part of my career, I was sucked into tech and ran a bunch of tech companies. Middle of my career, I was an investor both VC and also was a partner at Texas Pacific Group, TPG. So we were a top three in the world. So I got to, I got to be trained, I believe, businesses and apprentice for I got to be trained and mentored by some of the best in the world. And early on, it was very clear. I mean, we bought IBM and formed Lenovo. We bought Neiman Marcus and bergdorfs. We, you know, owned Alcoa, you know, the you know, we bought big, big companies and Burger King. One of the things that you would say is, at the end of the day, if you're replacing the CEO and you have to step in to try to run a company, that company is in big trouble. So we were very, very, very thoughtful about how we recruited, mentored and developed our management teams, because they do something, you know, very, very different. Doesn't matter that we had control positions. You're in big trouble. If you're misaligned with your management team, you're, you are a team together. So I think that it's, you know, very insightful.

Andrew Stotz 11:43
You know, when I was lucky and when I worked, when I was in Los Angeles in 1989 I graduated from university from Cal State, Long Beach, and I went to work for Pepsi, and Pepsi paid for my MBA, which I'm forever grateful. And in addition to that, they paid me to go to some seminars with a guy named Dr W Edwards Deming.

Blair Lacorte 12:03
And, yes, very, very famous.

Andrew Stotz 12:07
I was a 24 year old guy listening to this man, and I didn't know that. You know, many years later I would write a book about his 14 Points. And I didn't know, many years later, I'd be the host of the Deming Institute podcast and be on the advisory committee of the Deming Institute, which I am. And just before this, we were talking, I was talking with someone I was interviewing, and talking about, you know, the challenge for the Deming teachings is, how do you have continuity for a company at the board level, at the CEO level to implement these kind of radical ideas that need to be implemented over a long period of time, and just changing horses in midstream and saying, Okay, now we like lean. Now we like KPIs. Now we like this. And I'm just curious like, how do you see continuity in business, and to what extent is that important? Or in America, you know, it's very common to just switch out a CEO and go a completely different direction. Look,

Blair Lacorte 13:09
I, you know, I think that there are a lot of tactics, and sometimes there is a reason to change tactics. You know, at GE, we Six Sigma and lean, you know, we spent a lot of time. We were asset heavy businesses and manufacturing and global distribution made a lot of sense to actually, you know, completely shift. I always start with in a business the culture that business has to do with what value it produces to the end user. I've told my sons many times, you know, that at the end of the day, if you've never sold anything, then you don't understand business. You're either selling or you're actually supporting someone who sells. Now that doesn't mean you're not a very important support for someone who sells, but it really comes down to what value your customer is getting out of and I always work my way backwards. Now, if I can add more value to my customer by changing some of the tactics, I'll change some tactics, and I'll and I'll change the culture a little bit if the times have changed, but as long as you're all focused on the customer, then I can explain to you why I'm changing, and I can explain to you why the content continuity matters, and why continuous improvement means that you can change. I mean, part of the challenge you'll always get as you're successful is, you know, Chris Christensen's Innovator's Dilemma, right? The more successful you are, the more difficult it is to do something and make hard decisions ahead of the curve. Usually, you wait till the curve starts to turn you're not innovating, because the risk of doing something different means you're going to lose market share if you're wrong. And I, you know, I believe that I have focused on two types of companies where I didn't have to deal with that. One was, I did turnarounds, and the other is, I did growth companies, and they're exactly the same. In a turnaround you need to change because there's something wrong, and you're probably going to change 60% Team, most people don't realize in a growth company where you've doubled and you need to double again, things need to change, because there's no way that what you did to double the first time is going to allow you to double the second time. And so it's about change. So I was drawn towards businesses that inherently knew that they had to do things differently, but it's much more difficult when you're just slowly, you know, you're slowly winning and you're increasing, you know, market share a little bit every year. To do something really radical,

Andrew Stotz 15:32
yeah, yeah. Have you speaking of GE Have you ever read the book power failure by William Cohen?

Blair Lacorte 15:39
I have it right here in front of me on my bookshelf. Yeah, you know it's it, but it's a great book because it tells you a narrative. I'm a big believer in biographies, because they remind you that you're not alone and that you remind you that you're human and that this is much more complicated than a one formula. But I'm also a big believer in historical novels, because we always focus on a point in time without understanding how things got there. I thought what was really interesting at the beginning of the book was, you know how much of a influence the financers had in the early days of electricity. And the fact is that, you know, the Edison did not make the big money. The big money went to the guys who actually financed and expanded and built the infrastructure. And there's a lesson, there's a lesson in that. That's one of those patterns. What kind of business are you in, right?

Andrew Stotz 16:34
Yeah, such a great book, because it also lays out that history of the early, you know, phase of America and developing, and you know how to expand. And that is a part of what was happening, was the demands to expand eventually caused the financiers to have to, you know, get involved, because, you know, you need capital for expansion. Anyways, for those people that are listening or watching, you can, you can learn more about William Cohen on episode 739, where I interviewed him. And then I honestly have to admit, I didn't read the book before I interview him, because, you know, it's my worst investment ever. So we had a great conversation. I thought, I ought to get this. And I went on Audible, and I looked at it and it was 28 hours. And I just thought, Oh God, I don't have 28 hours. So then I decided, well, I'm gonna, I'm gonna give it a try. And I can tell you, I didn't stop. It was one week, and every time I was listening, you know, every chance I got, I was listening to it, and it was so good that I ended up buying the book. And now I'm reading through it, because I just love, you know, the physical book. But yeah, now that you mentioned about GE and, you know, six sigma and all that, it's such a great, you know, story of that journey. So, yeah, fascinating. What one question I just have before we move on to the big question of this podcast is, what is your you know, when, when a CEO looks and stumbles upon you in whatever way that they do. What is it that you are telling them they're going to get out of working with you?

Blair Lacorte 18:09
Sure? I, you know I work with as I think you do as well mid sized businesses for the most part. You know, someone who's got 5 million of revenue and maybe is making 2 million, or someone who's five up to 500 million, right? But they're profitable, and they've been doing it a long time. 95% of them are owner operators. They may not have founded it, but they own it over 90% so I have a unique kind of group of people, and they all have five things that they rotate through. One is the obvious one. Hey, I want to double my business again. Yep, right. So how do I take some input from the outside? I've been in my business. I know what I'm doing. I'm considered one of the best in what I do, but I haven't seen the patterns outside of my business. You know, Funnel Vision versus tunnel vision, right? One is, how do I double the second is, okay, I am an owner, operator, but really, I'm an operator, owner. I'm spending all my time I, you know, working here, I've got great people, but they depend on me. I would like to transition. How do I give up some control? How do I feel more comfortable? So one is how to double the other is how to move back into more ownership versus operating. The third is, ironically, hey, my relationships are afraid. You know, my kids are getting older. I really haven't focused on this. How do I work my relationships in my business and outside of my business, because I've realized that I've made it and I've got enough wealth. I'm always nervous, because owner operators are always nervous. But I want to work on my relationships, and I want to work on my health. I'm in the midst of writing a book, two books, actually, one on Dunbar's number on called relativity rules on how you manage that 150 people that you can emotionally connect to at any time. Why are people relevant to you and you? Uh, the second book is, you know, called an entrepreneur's, you know, Survival Guide, which is, it's not going to help you if you die, right? So what don't CEOs do? That is the opposite of what anyone in longevity now that I'm in the business with a nonprofit would tell you to do, and, you know, trying to sit down and say, Listen, I need to do some self care. And then the final one is just, you know, how do I diversify my investments? I've only invested in my own business. I don't understand how to look at and I know you do a lot of that, yeah, you know, how do I look at another business so that I can, you know, diversify a little bit now that I've got some capital and cash in the bank. But they're all, I mean, it's all common depend, you know, and they're from 4035, or 40 different industries. They're all asking the same question. So

Andrew Stotz 20:46
double business, I'm an operator. I need to transition, kind of, let go of some of this control and get my team running it. Number three, you said was relationships? Was number four, health.

Blair Lacorte 20:57
Well, you know, in fact, I skipped health and relationships. The other one was, I need to transition my business to my kids, or I need to sell. And it was something else that I know you are having expertise in. Most people don't understand that you can package yourself a year or two years in advance and ex and really extensively change how someone will value you depending on whether it's a strategic or a financial just doing some simple things to clean up the business so that, you know, the superpower when you're selling is, you know, one is, we talked about EBITDA, but really it's the turn you get on it. What's the, what's the multiple of EBITDA that you get from someone? And there's, you know, five or six different things that every buyer looks for, and if you do them in advance, you know the difference between getting two times EBITDA and getting 10 times EBITDA? It's an awful lot of money, right?

Andrew Stotz 21:50
Yeah. In fact, last night I gave a presentation. I do something called the in three hours series, and I talk about 13 different topics. And last night's topics was how to value, you know how to value your business. And so what I did is I went through a lot of different things. The first thing I kicked off was the idea that valuation is a negotiation. Don't think about it as a formula, and it is really ultimately, how do you position yourself? But then I went through all the latest multiples, EBITDA, PE and the like, you know, and try to help them to and I give them a little, simple little model, and so they can think about that. But then I presented some research that I have done, and that research, basically, I'm just trying to look at the Yeah. So I just pulled up a slide that maybe I'll share it. Hold on one second. You can find it interesting. Hold on for one second. Let's do that

Andrew Stotz 22:55
one second.

Andrew Stotz 23:01
Okay? So this is the slide for those people that are listening. What it says is two times profit can lead to three times valuation. And the point is, as your profit margin increases, the market begins to value your business more favorably. And so that's part of what you're talking about, is getting things cleaned up buyers become willing to pay a higher PE multiple, or EV to EBITDA, or price to sales. So what I did is I did a study of net profit margin of 26,000 companies worldwide, from 2000 22,005 to 2022 and I put those companies into five categories, from worst, below average, average, above average and best. So quintiles, and here's what I found. I found that the lowest group had a net profit margin of 2% and the highest had a net profit margin of 22% so the average net profit margin was 7% for these companies during this period, I looked at a pretty long period of time, because I felt like you need to smooth out the economic cycle. So for the listener or viewer here, if you got, if you have a margin that's above 7% Congratulations, you are above average. Now this doesn't break it down by sector. I do that in some other research, but what was critical was asking the question, what is the corresponding average PE ratio relative to each group? And so what I found was the worst groups had a multiple of seven times PE, and the best group had a multiple of 33 times PE. The average PE ratio for these companies over this period of time was 14. So when companies come to me and they have a 2% net profit margin, I know that they're going to trade, on average, if it was a publicly listed company, we're not going to talk about the discounts and other things, but on average, they would trade it seven times. PE, so if you can double your profits of your business, you've already increased the E in your PE, multiple. Multiple, and you've doubled your value there by doing that, but if you then are sustaining a higher level of net margin, let's say up to 4% net margin, by doubling. Now the market would value your business at a 10 times multiple. And so now we're talking about not just doubling, but tripling as you move up to become a higher profit company. So anyways, I just thought that was interesting.

Blair Lacorte 25:25
I think that this, again, when we dive down into this subject, which everybody who owns a small business at some point in their life will want to understand and will become important that it is not necessarily linear. It can be geometric on how you value your business, and then you add in to your point that it's always a negotiation. So, you know, you can even, you know, get a little more premium by being able to negotiate. I deal with a lot of private companies, and so I always give people the example. Look, you know, the average business I'm dealing with is maybe 25 to $75 million even though we go up to 500 million. So let's say you're a $25 million business, and let's say you have a 10% profit margin, so you're bringing in $2.5 million at EBITDA, right? And you know, let's just assume that you're going to get six or seven times right, because you're growing at 10 to 15% and if you're growing it higher than that, maybe you'll get a little bit more depending on the sector. So if you look at that and you ask yourself, If I bring in another million dollars, I'm going to Mike, I'm going to pull out another seven to $10 million so that's why focusing on EBITDA matters right now. Again, you can say, Hey, listen, I got to keep my growth rate up, and I want my top line to be good. But at the end of the day, if you take an extra year and you drop in and you get more efficient by cost, or you diversify some markets and bring in some more higher margin, an extra million dollars can be worth seven to $10 million to you as the owner. And that's a big deal, right? That's a big deal for someone who's, you know, put 1520, years into building a small business. So don't underestimate what Andrew was talking about, that understanding how valuations are done is really important, and it's really important before you're ready to sell, so that you can start to get ready. Right,

Andrew Stotz 27:18
exactly right. Because when you all of a sudden are rushed into selling, you know, you end up in a lot of trouble, because the buyer is going to knock down that price in every possible way. And I

Blair Lacorte 27:29
guarantee you, you'll try to be, you'll try to do adjustments to your EBITDA and say, Oh, by the way, that's not a reoccurring cost. Need to add that back in. That's a, you know, it's, it's a linear game, not a geometric game. Maybe you'll get a little bit more, but if you can, you know, do some things a year or two before you sell, I guarantee you you can make it geometric.

Andrew Stotz 27:48
Yeah, and that's the presentation. When I talked last night, I had about 20 business owners, and what I said to them is, how many of you have yourself and your team saying something like, I've got equity in the business, and I'm compensated partially through equity. And how many of you are underpaying yourself, and if you are not paying yourself and your management team a market or above market rate, the buyer is going to knock you down hard on that, because they're going to have to replace you and the management team at some point with market rate person to get them in. And so there's all kinds of things that you know people need to prepare themselves. So I always tell people, if you want, particularly in smaller businesses, but let's say mid size. I said if you want to increase the value of your business, go home and double your salary and get your cost to be real, so that once you say, I've got a 10% net margin, if your costs are not real and you're bare, you're white knuckling it, what ends up happening is that the buyer sees that and they adjust you down and say, Actually, your net margin is sustainably at, let's say 4% not 10,

Blair Lacorte 29:00
Right? So you didn't, you didn't get paid, and you didn't get the value. So the end of the day, you suffered, but you'll get knocked down anyway, because they're buying it to go forward, not in the past. So, you know, again, simple things when you think about it, but if you don't think about it in advance, it's very difficult to change anything once you enter a process,

Andrew Stotz 29:22
yeah, well, man, that's a long, great discussion on a lot of stuff, and I appreciate it. And I've learned a lot. I've written down your five points that you talked about and just thinking about the different things that you've talked about. So I appreciate that. And 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 it, and then tell us your story. So

Blair Lacorte 29:48
I'm going to tell you three bad investments I made. But there are three different themes that I think apply to everybody, and they all have to do with emotion, right? Worst. Investment I ever made, and I went to look for it. I have a plaque somewhere, because I made a plaque, and I put it on my wall, and it's and I just changed offices. So I can't find it, but I will put it back up. I invested when I was 22 years old in oil well. Now why was that in a bad investment? Number one, I knew nothing about the oil markets, and I had seen someone who had made money. Number two, I actually didn't learn about how the business worked. It was a bet on one, oil well, so there was no portfolio theory in it. Number three, it was all about greed. I had seen someone make money where they get, you know, paid every month for the rest of their life, as long as the well went. And I never and the greed kept me in I kept investing in it. In the end of the day, the oil was below quality, was not as much as we thought it would be, and I never pulled my money back out again. So greed and hubris of assuming that you are the guy that that well, if a well gets out of Texas, then the guy who's got that well either didn't have any friends or didn't have any relatives in Texas, so be very careful when someone comes to you with a great deal, why you? Why? Why you? Right? The second one was relates to something you've done for the last 30 years, the coffee business. I got out of business school. I had done an IPO. I made some money. I wanted to diversify. I had a my roommate, very good friend, started a business called coffee.com was going to do single estate coffees, which actually is very popular today. Back in 1999 it was new, we invested in it, and it seemed to be doing well. And then he needed more money, and then I didn't want to put in more money, because I didn't feel like it was going to it was going to actually make it. And, you know, friends and family rounds are really interesting, because that's the best way to lose friends or family. Now, I didn't hold it when it went bankrupt. I didn't hold my roommate responsible, but he never talked to me again. Felt like, you know, I'm a friend. I should have put more money and thrown it away, right? So be very careful about friends and families round. First, greet and hubris. Second, friends and family. Best way to lose friends and family is to actually invest with them. Okay, if it goes really well, they'll get diluted. If it goes really badly, they'll lose all their money. So be careful. Third is another emotion, which is pride. When I did my IPO in 99 we were the number one IPO in the number one year of the internet, okay? And, you know, sold some stock. I felt good about myself. And then I started to think, these guys are going to take advantage of me, because, you know, I don't come from a lot of wealth. I broker called me one day. I said, I want to sell a bunch more shares. At 60 called me and said, It's 59 and a half. You want to sell shares? And I thought to myself, he just wants his commission. You know, he's trying to take advantage of me. I said, You know what, I'm going to hold. Went from 59 and a half to 50 to 45 to 30 to 25 to 20 to 10 to six to two. And I didn't sell. Why didn't I sell? Because my pride got in my way. Do not get emotional about investments. You can get emotional because you are interested in it, and that motivates you to do research. But investments are done on the numbers, and they're done on betting on people, and the second you know that the people aren't any good or the numbers aren't working out, don't invest anymore, or try to get your way out. So that's my, that's my, you know, hat trick, you know. But I, as I said at the beginning, you learn something from everything you do. And I learned my lessons there, and I went the places I did make money. Some of the lessons came from there. The one thing I would leave you with, though, is the worst investment that you can make is to put your time into something that you don't enjoy or that you know is not going to work out. And that's about opportunity costs. I see people stay in things because they're going to grind it out, and they think it can be done. But when a business starts to middle, you have to ask yourself, are you on the wrong side of the macro trend? Because if you're too early, you're too late. Doesn't matter how smart, how hard working you are, it just doesn't matter. And you putting in another couple years just to prove that the macro is stronger than the micro is not a good investment in opportunity cost, or again, doing it for emotional reasons. You know, not, not a good thing to do, so be very careful. The number one asset you have to invest is your time.

Andrew Stotz 34:29
Yeah, wow. So when I think about this, I think about greed and pride and family and friends and then opportunity costs, a lot of different lessons. I'm curious if we were to think about a young man or woman listening right now, and you know, we want them to avoid these mistakes. Ultimately, that's the goal of what we're trying to get to here. What. Be your advice as to how to approach either any of these specific situations when they get in front of that situation of getting an opportunity to invest in a coffee.com or they got an opportunity to sell at a profit and they have pride come in, what would be some ideas about what they could do to not make the same mistakes we've made.

Blair Lacorte 35:23
Sure? Well, you know, if you bundle those, those first three up and, you know, getting emotional and not understanding, I would say, and I say this to my sons, the first thing to do is to not look at the business, but look at the business of the business. What is the market, and when is this market going to actually change or grow? Because, again, I said it before. It's worth saying again, most people fail because with good ideas, because they're too early or they're too late. So when someone comes to you with an opportunity and they say, get in. Now, get in. Now, you know you need to understand where you are in that macro cycle. That's the first decision you have to make. The second decision you have to make is your own portfolio balancing. There are some investments that you're going to you have a chance of losing it all, and you can make high upside, high risk, high return. How much are you going to put in that you know, of your wealth into that investment when you're younger, maybe you put a little bit more into it. But as you start to get to the point where you want to make money, as buffet, would say, you don't look for things that have the high risk of loss, you know, that's gambling, right? You look for things that preserve capital and that they can run through a cycle. So if they're too early, you can, you can wait for it, and you're very pragmatic about it. Now, I would say this is my personal opinion, is that if you want to go and take some risks when you're younger, you can do it with your time, because the opportunity cost isn't as expensive, because you can still learn no matter what you're doing once you hit 40 or 50 and you know what you're good at, and you're valued for that. Now you're arbitraging off of the skills that you actually have. So I would say, think, think about where it is in the cycle. Then second, think about, you know, preservation of capital. And think about where you are and where you're going to spend your time, but passive investments, taking high risks on passive investments. When you say it out loud, it sounds stupid. You have no control over it, and it's very high risk, right? At least if you're young and you're working someplace you can either learn or you can have an impact on the risk reward profile. So that's my thoughts for today.

Andrew Stotz 37:40
Great. And this is a very broad question. You can answer it any way you want, but what's a resource, either of yours or any other that you would recommend for our listeners?

Blair Lacorte 37:52
Sure? Well, you know, one of the things is, you know, most of the people I have in my coaching group are established owner operators, but that doesn't mean that a lot of things we cover there wouldn't be interesting. You can go to the PPE mastermind.com, and we put up all the speakers, we bring in. You have to look at you listen to the speakers, and you apply it to your type of business, or your situation. Again, this is business. Is an apprentice sport. It's got to do with growth. It's got to do with seeing patterns. It's got to do with understanding who you are and where you can leverage yourself. And the best way to do that, as we talked about before the podcast, reading biographies, looking at historical, company history you know, histories and documentaries or listening to speakers that you know get you to think differently about things, is going to accelerate your ability to learn.

Andrew Stotz 38:44
Yeah, that's that's what made Dr Deming such an interesting influence, because he definitely blew my mind as a young guy, and he still his thoughts and the way he talked about things really helped me think differently so

Blair Lacorte 38:56
well, just to be on a podcast that you know we talk about him, makes me feel good that you know, speaking be mentioned with greatness,

Andrew Stotz 39:05
yeah, and for those listeners and viewers that aren't listening to the Deming Institute podcast, make sure you go there, because we have conversations, and we're about to come out with one with the guy that probably spent the most amount of time with Dr Deming in his life, and he's 79 years old. His name is Bill scherkenbach, and we're going to be, I'm going to be doing some interviews with him, and we just had our first kind of discovery discussion today, and so I'm really looking forward to that. So last question, what's your number one goal for the next 12 months?

Blair Lacorte 39:38
You know, I think for me, where I am today. It's self care. What am I doing for myself? When you're a leader, sometimes you get boil like the frog. I mean, you have an obligation and you have, you know, it's a privilege to be a leader, and it's a privilege to actually be able to run a business. But sometimes you don't look at. At yourself as an athlete, and you don't give yourself the time and care that maybe you give some of the people that work for you. So I'm trying to not feel guilty about actually doing some self care and doing some things for

Andrew Stotz 40:14
me. Fantastic. I broke. I fractured my toe two months ago, and it's finally healing, and I just can't wait to get back out walking at the park, which I just realized I miss it so much. And that is a form of self care, because not only is it healthy, but it also gives me the space to think and, you know, go through ideas. So for each person out there, self care is, you know, different mean, has a different meaning for everybody, but it's such a valuable thing. So yeah, great,

Blair Lacorte 40:44
yeah. And I apologize the dogs have been unleashed, so I think that's probably is a signal of our time.

Andrew Stotz 40:49
Yeah. So 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. And as we conclude, Blair, I want to thank you again for joining the 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?

Blair Lacorte 41:12
Go out there and have fun this. You know, it's a privilege. 50% of the world lives on subsistence. Another 25% doesn't get to make the decisions if you have the financial or mental capability to try new things, you're all we're all blessed. So go out there and have some fun. All

Andrew Stotz 41:28
right, 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 will see you on the upside you.

Larry Swedroe 00:00
You know what the definition of a broker is, someone whose objective is to transfer money from your account to his account?

Andrew Stotz 00:07
There you go. And fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, continuing my discussion with Larry swedroe who for three decades was the head of Research at Buckingham wealth partners. And you can learn more about his story in Episode 645, now, Larry stands out because he bridges both the academic research world and practical investing. Today, we're diving into a chapter from his recent book, enrich your future, the keys to successful investing. And we're going to be talking about chapter 37 Sell in May and go away. And chapter 38 chasing spectacular fun performance, Larry, don't go away in May. Take it away.

Larry Swedroe 00:45
Thank you. Good to be back. Andrew, well, this is one of the things you hear every April, right at the end of the month, that there's this advice that investors should sell in May and go away like many of these axioms, bits of advice, they're legends without actual facts or logic even behind them, but there's usually a hint of truth somewhere in them to cause people to believe it. So let's look at the actual evidence. It is true that stocks have performed much better from November through April than they have from May through September. The stocks in the last roughly 100 years, we have data for the annualized premium from November to April was about 10 and a half percent, and the annualized premium from May to October was about 3.8% okay, so stocks got almost 14% from November to April, when T bills were about three and a quarter, and stocks got about 7.1% from May through October, when T bills were a little bit more than three and a quarter, so there's clearly evidence that stocks do much have done much better for whatever the reason, from November through April and hence, maybe people say you should sell in May and go away. But here's the facts, without even considering the taxes you would have to pay, and in the US, you'd be creating all short term gains, equities returned 7.1% per annum from May through October of 20 for the period through 2024 And outperformed T bills, which returned 3.32% by 3.8% now Gee, that seems like a pretty good equity risk premium to me. And so clearly, there's no logic, no facts. And here's what's really stupid in my mind about it. For you to believe in a strategy, there should be some economically logical reason for it to persist, so you could be confident it isn't just some random outcome. Maybe, for example, it could be a few outliers that causes this, like the crash in September of 29 right? We also had the famous crash in October of 87 when the market dropped 23% and then we had March of 2000 when the internet bubble burst, right, and 911 was September event. But here's the thing, in order for you to believe that stocks are going to underperform totally riskless treasury bills in that period, you must logically believe that stocks are less risky than riskless T bills, because the higher risk asset should, in the long term, provide a higher return. And I think there's nobody who would say stocks are less risky and therefore have lower expected returns in that period. So it's just another one of this bit of nonsense that gets repeated. I heard it again this April, and God help the poor fools who listen to it, at least so far as the month of May, had a huge rally so

Andrew Stotz 04:53
far. Yeah, and why? Why is it that you always talk about the stock? Returns in relation to the risk free rate. You know, other people talk about the absolute stock returns. Why is it you always go back to that?

Larry Swedroe 05:08
Yeah, because you should get a risk premium for taking the risk. And so the benchmark for any asset that has risk should always be the T bill rate. And then you can decide, Is there a large enough risk premium for you to justify taking the risk based upon your own individual situation? I will point out that 2022 was a year that seller may really work well, but it was the last time before that was 2011 went a decade of underperforming every year, and yet still it persists. So you're saying there's a chance, yeah, there's all Yeah, and then people claim at work around anyway. Look what I tell people is the thing you don't know about investing is the investment history you don't know.

Andrew Stotz 06:05
Let me ask you one other thing about this, which is that in your discussions, in your book, and other areas, your discussions about factor investing, you say, one of the things that's important about factor investing is that there should be some logical underlying, you know, relationship you know as to what you're saying. And reason I wanted to ask about that, because some people may say, no, no, but I found that relation between the price of butter in Bangladesh and s, p5 100 and it's, it's, it's a lasting relationship and, and let's say that there's something out there. But why is it so important that it makes sense,

Larry Swedroe 06:43
right? Because you have to be careful to not confuse correlation and causation. If you test, for example, a correlation, and there's a standard test you call the T stat, and the standard had been to test for a T stat of at least two that meant there was a 95% chance. You could be confident it was not a random outcome. Still, it was a 5% chance. But that's reasonable odds. Now, when I was going to college and in order to program a computer, going to date myself here, we had to go in and program punch cards, hand it in overnight and pray you got it back a few days later. Right? So the problem, the benefit, if you will, of that is you really had to have done your work created a good hypothesis for why there was a logical explanation. Say, for example, consumer confidence could predict stock markets. Let's say you believe that that would seem to make sense. If people were confident they put money in the market and put prices up, they became less confident. People would go down. And so you would test that, but you wouldn't test butter production in Bangladesh against the US, because there's no logical reason for doing it today with high speed computers and much broader, better databases and how cheap it is to run data. You can just ask chatgpt to run a correlation, and three seconds later, you might get an answer. The problem is, if you tested 20 and it would take you seconds and cost nothing or virtually nothing, you would get one of them would likely be correct, and it would be purely random. If you just ran 20 samples created 20, you might find one, and that's a problem. So economists, or financial economists, have proposed raising the T stat standard to at least three today, which would mean a 1% chance. But still today, I just read a paper on volatility. Is it a good predictor of downside risk? And there are lots of measures of downside risk, maximum drawdown, semi deviation, which is only the downside, and a whole bunch of other things, Value at Risk, etc, and they tested 1500 now, if you test 1500 almost certainly you're going to find randomly, you know, correlations, but it doesn't mean there's a logical correlation. And today, with the access we have to computers and artificial intelligence, it is very easy to torture the data until it confesses.

Andrew Stotz 09:53
Yeah, and that's interesting, because what you're talking about is, in the old days, you had to structure your hypothesis before you started. Tinkering, whereas now we can tinker and then, and then, you know, create a hypothesis. Yeah. And one of the things that reminds me of my, one of my favorite guys in that influenced me a lot in my life is Dr W Edwards Deming of the quality movement. And what he said was, there is no learning without a hypothesis. Yeah, you know, if you don't set a point right that you're predicting, then any outcome will give you information, but it may not give you knowledge.

Larry Swedroe 10:37
Yeah, that's it. That's you. You always have to confuse information. You have to make sure you don't confuse information with value added information. Oh,

Andrew Stotz 10:50
your bar is always so high. Larry, before we go from selling, may you can go away. I started as a stock broker myself in Bangkok, Thailand in 1993 and I was a research analyst, and I work with a guy from London, and his name is Henry Woodruff, and he said, he he said to me that I love the idea of being a stockbroker in Thailand, because when people ask, what do you do? You say, I'm a stockbroker. They want to hear your views on things. He said, But when I was in London, nobody cares about a stock broker's opinion about anything. And that was, that was pretty funny. But also, you know, we buy from my coffee business. We buy machines, coffee espresso machines, from the largest producer in Italy, chimboli, and we always had to get our orders in early because they shut down in August. So over the whole month of August is shut down. And we know that in Europe, you know, in the UK, to some extent they take long, you know, breaks over the summer. So I always thought that selling May and go away was simply people saying, Please don't bother me, because I want to take the summer off. So,

Larry Swedroe 12:00
speaking of stock brokers, my favorite line is stealing from Woody Allen. The definition of a stock broker is someone who's objective it is to transfer money from your account to their account.

Andrew Stotz 12:13
Yeah, unfortunately, that's that. That can be true. All right, let's move on. So that's a good one. What about, uh, chasing chapter 38 chasing spectacular fun performance. What do you want to tell us

Larry Swedroe 12:24
about that? Yeah, so one of the things we've talked frequently about in our discussions is that investors are prone to all kinds of behavioral errors, and one of them is recency bias, so they project recent events into the future as if it's inevitable, and ignore all the historical evidence. Okay? And that's what actually leads to the phenomenon called momentum, which has no logical risk based explanation. It's that people tend to overweight, in some cases, recent data and project it, and that pushes prices up, and it can also cause prices to go down as well. So there was a we know that when a fund has spectacular performance, what is Morningstar? Do they raise their ratings. And we know the studies have shown that when Morningstar raises its ratings, guess what, funds flow to those funds. So performance itself leads to fund flows, and then ratings follow performance, and that leads to fund flows. And that can actually cause momentum because those funds buy the same stocks, okay, but people forget what often causes spectacular performance is valuations going way up. Okay, so it's interesting. Study was done by Morningstar and Jeffrey patak, he conducted a study that looked at all mutual funds that gained over 100% in the calendar year, which is, yeah, that's spectacular. No one would deny that he found 123 of them between 1990 and 2016 so a 27 year period, just 24% of them, or, you know, just 24 of them, not 24% that's about 20% of them, made money at all in the three years Following the big gain, and much worse than the average fund proceeded to lose 17% a year. That's pretty bad, because if you make 100% and then lose 17% every year, you've given back. Maybe a huge chunk of those gains, maybe even all of them. So the doc also found that funds that had lost money in the years before the big gain were far likely to earn a positive return in the years after the big gain than funds that made money in the run up to the big game, he found 18 funds that earn more than 100% in 2020 and all of them were trading extremely expensive, three times the value of the NASDAQ. And we know the one of the certain things, although it doesn't predict short term returns, is valuations do or are the best predictor we have of longer term return. So you don't want to chase funds that had spectacular returns, because valuations have gone way up.

Andrew Stotz 15:58
And does it mean that you should if you happen to be the lucky one that's owning in a fund that has 100% return, should you exit it?

Larry Swedroe 16:09
Well, I would ask the question why you bought the fund in the first place, and what caused the gains, and how are the valuations? So for example, let's say you are an investor in a distress Value Fund coming out of 2000 and, you know, and the market and the spectacular returns and growth stocks in the 90s valued it poorly, and then you get the recession, you know, now, the PES are six, and the stock double in valuation to 12, leaving you about the historical valuation of value stocks. I don't see any reason to panic and sell there. Your basic reason for owning those that fund is you believe in value investing and prices were about their historical average. So why would you sell? Would you cause you to sell evaluations or stretch so that, let's say, historically, value stocks traded at 12 and growth stocks traded at 20. If value stocks had a run and that led to cash flows and value stocks were now trading at 18, and growth was still trading at 20. Well, now maybe I want to get it. Consider getting out or at least rebalancing, reducing my exposure, because the premium isn't likely. Their premiums are regime dependent, dependent on the spread in valuation.

Andrew Stotz 17:44
So the important part about that is that you state your intention, you write your intention in your investment plan, so that when you go into it, you understand what you're expecting. So in fact, in a turnaround fund, you may expect it's going to do poorly for a bunch of years, and then one or two years, it's going to have a huge return, as opposed to getting to the point where you're sitting on a huge return, and you're rewriting history because you never really wrote it, and then you you end up getting caught in this situation where you're coming up with reasons and excuses as to, you know, why am I owning this? Well, because, you know, I saw that there was a big tech boom, and, you know, therefore such and

Larry Swedroe 18:27
such, or fear of missing out another behavioral mistake, yeah, deadly disease.

Andrew Stotz 18:35
Bomo, well, I think that's a great discussion. And ladies and gentlemen, the sad news is you can't take June, July and August off. You got to stay in the market. So Larry, I want to thank you for another great discussion about creating, growing and protecting our wealth. And I'm looking forward to chapter 39 and has just one word as a title, and it's called enough. There's many ways to interpret that one word. And for listeners out there want to keep up with all that Larry's doing, find him on X Twitter at Larry swedroe, as well as LinkedIn, and follow him on sub stack, and you will get a notification in your email every few days of what he's doing. So keep up that great work. And this is your worst podcast host, Andrew Stotz saying, I'll see you on the upside. You.

Andrew Stotz 00:01
Andrew, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and continuing my discussion with Larry swedrow, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story in Episode 645, Larry stands out because he bridges both the academic research world and practical investing today we're diving into a chapter from his recent book, enrich your future the keys to successful investing. Specifically, we're going to be talking about chapter 36 fashions and investment folly. Larry. Take it away. Yeah,

Larry Swedroe 00:34
well, psychologists have long known that individuals allow themselves to be influenced by a herd mentality, right? And, you know, this was known back even in 1841 Charles McKay wrote a great book. I'd highly recommend it for those who are interested in history and finance and economics and markets really had a big impact on me to see history repeating itself often and again, right into the 1990s when I read the book and again with AI, all kinds of bubbles happen because of fear of missing out and this herd mentality. He wrote a book called extraordinary Delusions and the Madness of crowds, right? And Isaac Newton said he could predict the movement of stars, but not the madness of crowds, right?

Andrew Stotz 01:33
Crazy quote, you know, it just shows that intellect, you know, it's hard to win with intellect, you know, in a crazy market,

Larry Swedroe 01:42
yeah, exactly. Markets can remain irrational longer than you can remain solvent. It is another famous line, which is a warning not to bet against bubbles, because they can get bigger and bigger, totally irrational eventually, like a rubber band that gets stretched too far, it snaps back, and all those fake gains that weren't fundamentally based get erased and investors get wiped out. That's happened over and over again. South Seas bubble, for example, the Mississippi River bubble, there were railroad bubbles. There were even in the US bowling alley bubbles and.com bubbles, and maybe there's an AI bubble around. And I gave it this title because we know that there's a herd mentality in fashion. You know, you saw in the 60s, Twiggy wear this really short skirt, a mini skirt, and that became the immediate fashion, whether women should have been wearing those appropriately or not, and fat ties or skinny ties, whatever's in, everybody follows that fashion. So there really should be no surprise that we would see, or at least expect to see this madness or crowds, and what I would call recency bias, where people forget all of the economic history that they may have learned if they have knowledge of history, and focus on whatever is the current madness, whether it's Bitcoin or whatever it might be. And one of the to me, one of the great anomalies, if you think about it from a rational perspective, in finance, I don't think we've even talked about this one, Andrew, there are about 10,000 mutual funds and about 10,000 hedge funds and Lots of SMA or separately managed accounts, and there are only about 3600 stocks today. Why do we need so many funds? And what we know Wall Street's marketing machines are great at creating product. So whenever a fad comes about, and there was a.com era, so there were dozens of funds immediately that had the name.com somewhere in the mutual fund. Now there'll be artificial intelligence fund and crypto funds, and whatever it'll be, there'll be hundreds, if not 1000s, of them. What most people don't know is 7% of all mutual funds disappear every single year, and that's mostly because most of these funds shouldn't exist in the first place. It's the advertising machines of Wall Street that create these in the 1960s and 70s and into the early 80s, small cap stocks dominated, you know, far outperformed large and guess what? Mutual funds came out with lots of small cap funds to try to take advantage of it. And then growth stocks outperformed in the 90s, and then you got all that. And so investors really need to be careful and not get caught up in these fashions. And the follies and fear are missing out. Have a well thought out plan that's based on empirical evidence, long term results, and avoid the concern about, hey, my neighbor made all this money. I gotta make sure I don't miss out on what he's doing.

Andrew Stotz 05:20
This chapter was particularly interesting because it kind of shadowed my life in some ways, because in the final second, second to last page of this chapter, you said, A perfect example is the asset class of emerging markets, when the asset class was providing great returns in the period of 1987 through 1993 and then you highlight 35% per year. There was a tremendous proliferation of emerging market funds. Now, before I go on to your main point, the after that, the point, from my perspective, was that I became an analyst in an emerging market in September of 1993 the first four months of my job, the stock market doubled. And by January of 1994 the Thai stock market had hit its peak. And we still haven't reached that peak

Speaker 1 06:15
yet. And 32 years later, now it's

Andrew Stotz 06:19
incredible, yeah. I mean, how, how long? I mean, I'm pretty much convinced that that's just generational. You know, you just got a huge generation. A generation gets wiped out, and then it takes so long they never get back in the market. At least, I think that's happened

Larry Swedroe 06:31
in Japan, of course, right? 35 years now of no real return. Well, it

Andrew Stotz 06:36
happened in the US too, after the Great Depression that it took many decades to get the US market back up. So that was just a little personal. The beginning of my career was right at the end of that bubble. Luckily, I was able to, you know, ride the wave down and survive. But yes, our stock market fell from 1994 it fell 90 90% roughly. And in US dollar terms, it fell about 95% so if you had put $100 in, you would have gotten $5 out if you if you bought at the peak and you sold at the bottom, which was about 2021

Larry Swedroe 07:13
I think it was Wow, and it's Oh. And I'm sure a big part of the crash was 98 when long term capital went under, took the emerging markets with them, yeah.

Andrew Stotz 07:23
So that was just more like that was Russia and other things that were happening at that time, all at the same time, yeah, yeah. But you know, the big question I had in my head when I was reading this chapter is, how do we reconcile the efficient market hypothesis with these kinds of madness. And I thought I wanted to ask you a question, which is, you know, normally, when we talk about the efficient market hypothesis, we talk about what it is, you know, in other words, it's semi strong form, or it's weak form, or it's strong form, or, you know, those technical terms. But I would like to ask you what, what is an efficient market? Not so, for instance, just be is efficient market? We know is assimilating information extremely quickly. But what is it that we should don't ascribe to an efficient market? For instance, if you say, well, there's bubbles, therefore the market can't be efficient. Can you tell us, like, what the efficient market does not mean?

Larry Swedroe 08:27
Yeah, so the first thing is there. It's called, for a very good reason, the efficient market hypothesis. It's a theory or hypothesis. It's not a law like we have in physics, and it's basically a model to help you think about how the world works. That's number one. Number two, what the efficient market hypothesis says. Really, it never says if the current price is the right price. It says the current price is the best estimate of the right price. Okay? And the way you test whether markets are then efficient is whether you have evidence that there are more investors who outperform than would be randomly expected to do so. So a good example, we've used this before. I think a few times. You put 1000 people in a stadium and ask them to flip coins, and they flip ahead, they win. If the tails, they are eliminated. At the end of 10 flips, maybe have 10 people left, Andrew, are you going to bet that they will be successful in the next coin flipping contest? Nope, nope, right? And because, in a world of investing today, 2011 farm and French published the. Paper, and they found that about 2% of active managers were outperforming, on a statistically significant basis, beyond the randomly expected, which was less than what you would have expected randomly Okay, SPIVA S and P publishes what they call the SPIVA, which is active versus passive scorecard. And again, this year in the US, they showed that if you're a quartile one performer in the first year, there's a 25% chance randomly you would expect to repeat that performance, and then there is a, say, a 6% chance you'd repeat that again, okay? And the answer is, then do more than 6% or whatever the right number is, repeat for three years in a row, and in every asset class, they found that less than that did so so you can't tell. It's hard to at least then there's no one has found a way to do it yet. How do you differentiate between skill and luck? And if you can't, then it's hard to say the market's not efficient because people can't exploit persistently mispricing. Now, why do anomalies exist? If the market is efficient, anomalies are for example, I've talked about this before, lottery stocks. So stocks that have a distribution of returns that is far from normal. Most of the time. Like lotteries, the return is zero. The mean return, if the state is taking 50 cents on the dollar, of course, is minus 50 cents. So if you buy $1 ticket a million times, you'd expect to end up with a half a million dollars. But of course, your distribution. If a million people are playing, you know, a few people will hit big home runs, and the most will lose 100% right or close to it. So it looks like a lottery ticket. Stocks that have that kind of distribution, which means they have God, awful returns. They actually this group, which I'll mention in a moment, have returns that underperform treasury bills which are totally riskless, right, at least for US investors. So they are stocks in bankruptcy, penny stocks, large cap growth stocks with high investment and low profitability. Well, a lot of.com stocks, for example, you know, fit that definition, but people get enamored by the fashion of the day, or some, you know, Reddit post that tells them you should buy GameStop or whatever. And so these prices get overvalued. But the problem is the risk and the cost of shorting are so great that it's the sophisticated investors can't risk betting against it to drive the price down, to drive the price down, you have to go short. So Melvin capital, a highly successful hedge fund for decades, noticed that Gamestop had been rising, rising, and this company had horrible financials, and it shorted it. And the way you short it, you borrow the stock, sell it. Say the stock was 35 and they thought it was worth 10, okay? And now you hope to buy it back at 10, and then there's your profit. The problem was people on Reddit ganged up on them and able to do it, and drove the price up, I think, to like 400 and Melvin capital lost four or 5 billion, and basically lost all of its assets and returned the capital shut down after decades of strong performance and and ever since that incident where the markets learned that these retail investors had figured out how to game the system, and I'll touch on that for A moment, very few people are willing to go short stocks, which means I think you'll have more in, you know, inefficient pricing on these smaller stocks. It's hard to do that on Microsoft, because you can't squeeze an investor in those stocks. The market cap is too large. But in these small companies, these people in gang up. And the way they did it is they figured out you didn't have to buy the stock itself. What you did was to buy an option, probably even an out of the money option. So if Gamestop is trading at 35 you could buy a call, say. 40 or even 45 and the more out of the money, the less you have to pay. So you don't have to put up a lot of money. The people who write there and sell you that option have to hedge that risk. So will they go in and let's say they sold the option on 1000 shares, they may go out and buy 50 shares, and if the stock starts to rise towards the exercise price, they are doing what's called delta hedging, increasing their exposure so or at their holdings, so they can't get killed. And so these people come in and start buying calls, and they tell everybody else to buy calls, and then the hedgers have to go in and buy the stock, and it's dropped, and there's little liquidity. And that's how Melvin capital got squeezed. And they figured out they can gang up. They look for low capitalization stocks with large short positions by some institutional investor, and they can gang up. Institutions can't do that. It's illegal. Individuals can and you know, so that game, sadly, has been played, and they're all cheering, but it's made the markets more inefficient, and it will lead to people losing fortunes, likely because they'll engage in this stuff. And eventually, Melvin capital went from 400 think last time I looked, it was trading at 35 again. So how

Andrew Stotz 16:31
would you describe let's say, take the.com bubble, where we were at the peak of the bubble, and market optimism was super high. Number one, we could easily say that, you know, information was getting into the market very, very quickly. That's, you know, part of the efficiency. You could also say it was the best estimate, you know, of the price based upon the feeling of the time or the expectations of the time. Could you say that? And then I wouldn't say that and say that, in the end, was the price wrong?

Larry Swedroe 17:04
Yeah, I think Gene farmer has argued you can't tell a bubble till after the fact. And in general, I would agree with that. However, to me, there that particular bubble, which burst in March of 2000 was easy to tell and known before. The only problem is you can't bet against it, because bubbles could get bigger and bigger, and you don't have enough capital to last until it burst. And the reason I can say it was irrational Was this the best predictor we have of long term stock returns is valuations, and a good one is the cape 10, or the sickly adjusted price earner. And almost as good ratio as the current P E ratio, okay, not quite as good the P E ratio of the Q, Q, which was the high flying tech stocks, the NASDAQ, you know, 100 was over 100 that meant the expected real return was 1% when tips were yielding 4% no credit risk, no inflation risk, to me, that could be resolved one of two ways. Tip yields, how to collapse, or P E ratios, how to collapse, because there is no way that these 100 companies could ever justify their earnings and get them to grow so fast to justify 100 P E, they would have been more than 100% of the whole economy. It was someone did some math and showed you can't make the earnings. Maybe one company could, and Google, maybe, you know, became that one company and the other 99 you know, like Intel and Cisco, you know, they still, in some cases, haven't passed their high price of that period and have been horrible investments. So I think again, it comes back to you can have bubbles because of what is called these limits to arbitrage. And the key to investors is don't get caught up with these fashions and folly and just have a broadly diversified portfolio that you can stick with, you know, and ignore the noise of the market, and don't care what your friends are doing. So

Andrew Stotz 19:31
I want to go back to my question about, you know, what efficient market isn't? Let's say someone doesn't know anything about the market, and they hear people saying, Oh, the market's efficient. Blah, blah, and then they look at that, and they see it go up to this huge bubble, and then they see it collapse. And they say, I don't understand how that's efficient, but I want you to answer what is. What is not? What are we not saying efficiency is?

Larry Swedroe 19:52
Yeah, one was saying it's not impossible to outperform by spotting bubbles or finding. Individual stocks and trying to time the market. However the overwhelming body of evidence is that playing that game, we can call it, active management, is gives you about the same odds of winning as playing at the casinos in Las Vegas. You can win, but the odds of doing so are so low. And if the vast majority of institutional investors, who are run by people with PhDs in physics and you know, mathematics and finance and their rocket science, the best databases, and you know, they are spending 100% of their time on this stuff. What odds if you look yourself in the mirror and say that I can outsmart these guys when they fail most of the time to outperform? And Warren Buffett, the greatest investor maybe of all time, hasn't outperformed for the last almost 20 years. The market efficiency caught up with you know, with Buffett, he was able to exploit inefficiencies over time, and as my book The Incredible Shrinking Alpha showed, Buffett was able to exploit things that people didn't know, and once those papers get published, those anomalies disappear, and Buffett couldn't outperform anymore.

Andrew Stotz 21:28
Yeah, it doesn't mean he didn't end up with a huge amount of money, but Right? And in fact, you know, out performance in your early years is extremely valuable, because generating the capital that's compounding at, let's say, a market rate for the past 20 years, exactly. So, okay, well, interesting discussion. And I know I for a lot of people out there, you know, we think about the efficient market hypothesis, and we think about what it means, what it is, and what it isn't. I think what we can clearly say is that when there is a narrow, real focus of the efficient market hypothesis, and that is the dissemination of information into the market, and also the efficiency of the market is proven by the fact that very tiny number of people, even less than would be predicted through simple statistics, managed to outperform.

Larry Swedroe 22:26
Well, let's add to this one other thing. If you doubt the markets are efficient, all you have to do is look what happens when a company announces an earnings surprise just the other day, maybe it was today, even aber Combi and Fitch announced better than expected earnings. Now the price didn't go up, like, from, say, 30 to 30 and an eighth to 30 and a quarter. It went from 30 to 40 like instantly on like the first two trade in one of my books, I cited a study that the vast majority of the performance after news is on the first trade that tells you how quickly the market incorporates new information.

Andrew Stotz 23:14
Yeah. And the funny thing is, that may not be a very profitable trade. Their next quarter could be terrible.

Larry Swedroe 23:20
Well, in the long term, that's so the market incorporates this new information. It moves when you get surprises, which by definition, is what unpredictable? Yep. Well, Larry,

Andrew Stotz 23:34
I want to thank you again for this great discussion, and I'm looking forward to the next chapter, which is chapter 37 Sell in May. Wait a minute, it's May, and go away a great old saying in the market. And for listeners out there who want to keep up with all that Larry's doing, find him on X or Twitter at Larry swedroe, you can find him on LinkedIn and also follow him on sub stack. He's relentless. They just keep coming into my email box. It's hard to keep up with all that you're writing. You got two of them today. Incredible. You know that's, that's, this is wonderful. I've enjoyed it. So this is your worst podcast host, Andrew Stotz saying, I'll see you on the upside. You.

Andrew Stotz 00:01
Andrew, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story in Episode 645, Larry stands out because he bridges both the academic research world and practical investing. And today we're diving into a chapter from his recent book, enrich your future, the keys to successful investing. And specifically we're talking about chapter 35 man money Larry, take it

Larry Swedroe 00:32
away. Yeah, you gotta ring the bell there for this one. I wish I used to have a bell. I don't

Andrew Stotz 00:40
know if there used to be a bell on my little thing here, but I'm ringing stuff right now, but I don't think it's coming up. We'll

Larry Swedroe 00:46
see anyway. So Jim Cramer, for those who don't know him, he was an ex hedge fund manager. He worked at Goldman Sachs, and clearly he's become one of the most recognizable faces in the world of, you know, finance, he actually rang the bell, I think it was today, on the 20th anniversary. So good timing of his show on CNBC. So he's clearly been a success in terms of entertaining. That's

Andrew Stotz 01:19
20 years would be, I would say that's pretty, you know, amazing to be that. Yeah, march

Larry Swedroe 01:23
2025, march 25 205, was the introduction of his show, and the audience numbers went up 140% in the next quarter. So clearly, has been a success as as an entertainer, the question that we really want to know the answer to is, is advice have any value, or is it just entertainment, and you're best off ignoring it, unless you like people banging bells and blowing whistles and, you know, and clowns And you know, it's my opinion, it's sad, a very smart guy has turned himself into a caricature in order to get good ratings. And I backing that statement up with the academic research that actually looked into what happens if people followed his advice. So the first study that I cite in the book is a 2018 study on the performance of his charitable trust and what those recommendations did and he had established that trust. So from its inception, the portfolio through the period they looked at, which was through December 31 2017 the fund returned a total of 97% during that same period, an investment in the s and p would have returned 204% and that, of course, doesn't even take into account Any trading costs or taxes from all of the the trading. There was another study that was done that was published in the journal investing in 2012 it looked at his buy and sell recommendations over the period July 28 oh five through December 31 2008 now, of course, this was a period of not very good returns, right? But what the researchers found was three key conclusions, one, investors were clearly paying attentions as the stocks that he recommended had abnormal returns of almost 2% on the day, uh, following his recommendations. So his show appears at night. People come in in the morning, and the stock jumps. Now, of course, that doesn't mean you made any money. Let's say the stock was at 10, and the first price, because you get all these people trying to buy is 11. Well, the stock went up 10% but you didn't make anything right? Nobody got that. That's called market impact cost, right? The returns for the recommended stocks were both positive and significant for the day of the show and the 30 days actually prior to the show. So it seems he was actually recommending stocks with short term momentum, which there is evidence of, right? However, the returns were negative and significant in the two to three days through day 30, following his recommendations. So now you have to ask who actually made money. Well, the naive retail money comes in, pushes the price up and pays their market impact cost. The sophisticated, high frequency hedge funds know the Kramer knows nothing really. The investors are naive. They drive the stock up. They come. In and go short it, and the price goes right back down. And there's a third study that basically done in 2005 is the market mad evidence for Mad Money. And it found exactly the same thing, that the prices rise overnight and very quickly they get corrected, meaning that Kramer added actually negative value for the people who try, you know, to implement, because they drove the price up when they're in their, you know, when they're buying frenzy. And then the smart money comes in. Knowing Kramer knows nothing of any real value, price reverts back to basically where it was before he made the recommendation. So that's showing really two things, investors are naive. Kramer is an entertainer, not a financial advisor who adds value. And the third thing, and maybe the most important lesson for investors, is the market is really highly efficient, and that it's very hard to beat it, because clearly, Kramer is a very smart guy. I just think his talents are wasted. Except I'm sure he's making a lot of money being paid for an entertainer, but not really for his stock skills. The last thing I'll mention in the chapter is there's a major study on this whole issue of gurus. It was done by the CXO advisory group. They covered 68 gurus, including Kramer. They looked at forecasts over the seven year period from oh five through 1260, 584 forecasts. Basically they found there are no real experts. The distribution of their accuracy looks virtually identical to a bell curve, but slightly to the left, meaning, on average, they do worse. The average accuracy was 47% which happened to be the same score as Kramer's. So of all the experts who are non expert, Kramer was average at being a non expert.

Andrew Stotz 07:15
You know, there's so much to unpack in that one too. Like, you know, one of the things that's really important about, you know, how to construct these types of studies. Because, as you said, if you don't take into consideration, for instance, the fact that, okay, let's just say that Kramer is a great entertainer. He gets people really excited at night. And all the buy orders compiling up before market open. And now you've got, you know, a huge amount of buy orders for this thing, instantly the stock is going to gap up. And when it gaps up, the gain is gone, yep. Now

Larry Swedroe 07:51
and then it reverts back, yeah,

Andrew Stotz 07:54
and then it comes right back to where it was. Or worse, there's

Larry Swedroe 07:59
another study, a famous one. You know, Value Line used to boast that they had these great returns, and then a group of academics took a look at it, and here's what they found. Value Line published their results Friday night, the letters went out. The investors got the information over the weekend, and the prices jump Monday morning. And guess what happens?

Andrew Stotz 08:26
You can't buy that. So the way that we can't buy it,

Larry Swedroe 08:29
if the stock closed at 10, and they're recommending at 10, you can't buy it there, but they calculated their gain from the closing price of 10. But it doesn't work that way, and maybe it persists for a few days, maybe even a bit longer, but eventually it mean reverse. So what

Andrew Stotz 08:47
we've I've done this type of testing in my own company, and the way we've solved that is a couple of ways. One way is to take five day average price after the recommendation, another way is to just take the second day or the third day and say it's going to take now, it's going to take some time for people to get into this stock. But when you look at institutional investors, there's very rarely are they going to be able to move a sizable amount of money into an idea in, you know, two or three days. So they may need two weeks or a month to go through their investment committee, if it's, if it's an active fund, and they are looking for ideas and it's a new idea for them, you know, it isn't going to happen like that. And so that's the reason why, you know, it's important to understand, you know, how people are actually measuring these types of returns? Well,

Larry Swedroe 09:43
I would add this. I don't think you even have to do any work on this, because no institutional investor is going to make investment decisions based on Cramer's recommendations, because they're aware of the literature almost. Certainly as a professional investor, and they know it has no value, right? Here's the thing, especially, and we're living through that kind of period now, while it's markets are always uncertain, nobody knows what the future is going to be and but there are times when things become or feel more uncertain, and this is certainly one of them, self imposed uncertainty because of President Trump's policies on tariffs and the tax bills and other things. So when times become more uncertain, people look to somebody. You can tell them what's going to happen. Some expert, sadly, there's only one person who knows where the market's going, and neither you or I nor anyone else on this planet will get to speak to him or her, at least while we're on this planet. So you're best off just ignoring these forecasts, because the research shows there aren't such, you know, super human beings who are great forecasters, right? Yeah,

Andrew Stotz 11:11
yeah. And, and also, the guru statistics are interesting, as you say. It's a normal distribution, but, but shifted to the left, meaning that's before trading costs. Remember, and but what I would add besides trading costs, not all of them have a promotion machine like Kramer does. So Kramer has the advantage in these numbers, if you look at it, you know in this way is that he can at least get enough people behind it to pump it up on day one, many of these gurus can't even get that kick. You know that would, you know, in theory, show that makes it look good, but isn't real. Yeah. So that's the guru statistics fascinating. And, yeah, I found this really interesting. And the question is, has any I wonder if anybody's ever measured the performance of his compensation, because I suspect the performance of his compensation has been incredible. Ryan, well, yeah,

Larry Swedroe 12:11
it's one of the most popular shows. People seem to love the entertainment. I just hope they're not listening to the advice they definitely are when he's ringing bells and slamming hammers and, you know, I just find it sad that he's turned himself, a very bright man, obviously, into a caricature. Yeah,

Andrew Stotz 12:31
There's two other things I would say before we wrap up in. The first one is that his show is showing 250 times a year, I guess, or Daily Show. So, you know, you got to think, Okay, wait, so he's going to come up with 250 outperforming idea. You know, that's impossible. So already, just logically thinking about it doesn't make sense. But the other one I was going to share is that in Thailand, as well as most of these emerging markets, brokers and the analysts and the gurus at the brokers are, all they're doing is pumping and pushing, you know, let's say one stock a day, and getting all the power of their broker behind that and pushing that stock and then saying, you know, I move the market, and that's why you need to follow me. And people see that, and they feel as though that person really moves the market. But they really unless they take an honest look at what's happening, they people gather around that type of stuff.

Larry Swedroe 13:31
Yeah, what you might suggest to them is going to chat GBT and look up the terms pump and dump.

Andrew Stotz 13:41
That's a good one. All right, so Well, Larry, that was a great discussion, and it helps us to stay away from the TV. I shut the TV off many years ago. I sold my TV when I was young, and I never

Larry Swedroe 13:53
that's got to improve your investment outcome, because you can't make mistakes listening to basically, what's investment pornography? It's meant to titillate and excite you, but, you know, it doesn't have any real value. You know,

Andrew Stotz 14:09
I started as an analyst in 93 and in that time, really, market was very immature. In Thailand, it was extremely volatile, you know, and the way that we got news was the newspaper which arrived on our, you know, on our doorstep at five in the morning. So each morning I had, like an architect drawing table at my house at 5am I'd wait for that newspaper to come, make a cup of coffee, sit down, and what I would do in those days is I would cut out stories and I'd paste them into my little book, and then I'd take notes, because also I was learning at that time, it was 93 I was 28 years old, or whatever, and I was learning about the market. So I was learning about the ticker codes and the companies and what they were saying. And then I would go in, and then we would write up, you know, here's the news of the day. We weren't necessarily saying that certain stocks were going to, you know, fly that day as much as. Kramer is, but we would, you know, put together, this is what we think is interesting. Now 10 years later, let's say in 19, in 2003 I was head of Research at Citibank at the time, and I remember walking in my office at about 630 I had already been through all the papers, and as I walked in, I saw my analysts with their feet up on the desk reading the paper. I went to the sales room, and I saw the sales people all reading the paper, and then I saw the sales traders reading the paper, and I thought to myself, How the hell am I ever going to get a competitive advantage in reading the paper? And I immediately, on that day, called the Bangkok Post, and said, cancel my subscription. And I never received papers ever again after that, because I thought I got to think different. You know, I got to think, you know, I got to get away, and it's not so much. And I always tell people that don't worry too much about where you're going to go, what you're going to think, worry about getting detached from what everybody's digesting first.

Larry Swedroe 15:59
Here's the big lesson I've written about this and my books, including my investment mistake book, what you learned is to not confuse information with value added information. In other words, if you know something because it was in the newspaper, right, everyone else knows it as well. So it has no value. It's in the price, which is why, to me, one of the most ridiculous ads of all is by Barron's, which popular publication, and their ad is Barron's before the market knows you're reading a newspaper, but get the news before everyone else knows. I mean, I mean, how ridiculous is on the face of it, it's absurd. Yeah,

Andrew Stotz 16:49
I think that was an interesting thing. And then, you know, I'm sure at times you've heard podcasts, or you listen to something, and you've listened to a guy, and you try to follow what the guy's saying, and really, he's not saying he's he's presenting a lot of news, a lot of history. He definitely has a depth of knowledge of this, but he's not actually bringing any value in the conversation. Value about the judgment of, let's say, what could happen to margins going forward, what could happen in this and that, you know. And so I listened to one of these guys one morning on podcasts, and it was so clear, it was so good in the sense, that he was such a master bullshitter that made him sound so smart about the topic. But it was all about the past and this and that. And then I stopped it. And I got out of the shower. I stopped it. I sent it to my team. I said, Cut these three minutes out as an audio file, a video file, put it in my valuation master class boot camp. And then the next night, I had my students listen to and I told them, write down your notes of what you learned from this. And so I do this every single time with the students, where I asked them to write down and by the end of three minutes, they're totally confused, but they're trying to extract value. Because I'm telling them, as a teacher, listen to this because this is valuable. I don't tell them it's valuable. I just listen and get your takeaways. But in the end, I go, the whole reason why I'm showing that is that this is an example of talking aloud but not saying anything. You know well,

Larry Swedroe 18:17
what I try to do when I try and write, when I write my columns on sub stack and other places, and people want to I get asked, what's going on? I got asked the question often in the last several months now, is this the end of us exceptionalism, right with the change in policies and de globalization and tariff wars and all this other stuff. But so instead of making forecasts, because I learned long ago, you have to be very humble about making a forecast, right, all I tried to do was point out, here are the facts, here are the risks. Here's what could happen, here's the impact on your portfolio, and what are the things you might want to think about, right? So in my article is this, you know, a new era is the great rotation begun. I pointed out that here are, these are the facts, it's possible, you know, the US could end up causing recessions, right? We could see all kinds of issues. I list them, and then I said, and by the way, US stocks, which have outperformed for the last 17 years, which is why we have this issue of us exceptionalism, and I pointed out the reasons why people believe US stocks have outperformed, including better labor laws for businesses, easy to hire and fire people as one simple example, more freedom of capital. It's easier. You know? To get businesses started much the world's deepest capital markets. Entrepreneurs find it much easier to raise capital than, say, in Thailand, right? But I also pointed out that in that 17 year period, the vast majority of us outperformance came not from earnings growing faster they did, but not that much faster. It was mostly because PES of US stocks went way up, and which means future expected returns are now lower, and PES of foreign stocks actually went down. And if that just ended, foreign stocks should outperform. But what if? Now people believe the US was no longer this exceptional place and capital started to flow out. People were worried about, you know, trade restrictions and capital, you know, being confiscated even right? So it could reverse. So you want to think about, are you willing to live with those risks, or should you build a more diversified portfolio? So I'm not making any forecast, because I know I write this off, and my crystal ball is always cloudy. So want to just think about the risk and what risks you're willing to bear,

Andrew Stotz 21:21
yeah, and, you know, 17 years ago, emerging markets were like a little baby coming out of the crib, and now they have, you know, consumer, you know, consumption is is much higher, and wealth levels are higher in the middle class and, you know, and there's a lot of intra Asian trade, you know, that's significant, you know, so it's, it's a different world. It's going to be interesting to see on the next, you know, five or 10 years ago in that,

Larry Swedroe 21:48
yeah, we're looking at emerging markets and international developed markets trading, you know, like at 30, 40% discounts. In fact, two recent studies have found if you take, I'll just make this example pop so it'll be directionally correct. You take, say, General Motors. Let's take a different one. Let's take a Pfizer, a US multinational, global pharmaceutical company, and Hoffman La Roche, a global, international pharmaceutical company, but one is listed on the New York Stock Exchange, and the other is listed on some international stock exchange. If you did studies and found hundreds of companies that look the same, except for their listing. So they're both global, so they might have both say 40% of their sales internationally, right? The US stocks traded something like a 40% or more premium, even though their sales around the globe are the same. It doesn't make sense, really. So that's why, in particular, I think you're likely to see us companies. I just wrote this up the other day, buying up international stocks because you're taking your stock with trading at 25 PE and you're buying the same company basically at a 15 PE. So you're using your cheap capital to buy an expensive company that's got much higher cost of capital. So there are, your returns are going to be higher when you buy it, you immediately convert their earnings from a 15 PE to yours at 25 simply because of the listing.

Andrew Stotz 23:45
Yeah. And one of the reasons why Asia and particularly emerging markets, are trading at a discount is their profitability is at a discount. But one of the things that's interesting about Asia is that, like America, the markets are dominated by large companies, yeah. But unlike America, those large companies are not trading at massive multiples. No, they're not. So what that means is that the whole the mid cap space in Asia is exposed. It shows, you know, that they're not hidden, they're low PES and stuff like that. But if you look at America, I think the last statistic I saw, I don't know if you've seen this, but it's like 30% of mid size or small size listed companies in America were losing money.

Larry Swedroe 24:34
It's certainly I don't think that's true of mid size, but it is certainly true of the stocks in the Russell 2000 which is the smaller part

Andrew Stotz 24:43
of so it's something like, is that? Is it 30% what was it like? It may be higher. It may even be 40, yeah. And so the result is that actually a huge part of the US market is in very serious trouble, not doing that well. But when you look at the overall profitable. The

Larry Swedroe 25:00
companies are staying private, or were taken private,

Andrew Stotz 25:03
yeah. And so my point is that, though the US market looks like really, you know, high PE and in earnings have risen quite a bit at these large companies, there is a nasty underbelly that if those seven, you know, 10 largest companies, pe started to come down and became less sensational all of a sudden. What would be exposed is, Whoa, there is a lot of companies in the mid and particularly small case, small cap space, that are struggling,

Larry Swedroe 25:33
and I'll point out that they are trading at lower valuations. But let's we could dig a little bit deeper, having a little fun here on this so US stocks have performed well, but a big chunk of their earnings increase was that they were able to extend the duration of their debt at much lower interest rates Up until 2022 and which they did, unlike our US government, which foolishly kept funding short, unlike Austria, for example, who issued 100 year debt at under 1% Janet Yellen has to go down as the dumbest Secretary of State in history,

Andrew Stotz 26:16
in my opinion. Yeah, she missed a huge opportunity on that one? Yes,

Larry Swedroe 26:21
a huge opportunity was missed there for political reasons. So shame on her. That's not her job, right? Is to get someone elected or whatever, at any rate. So a lot of the margin increase was because interest expenses came down. Now you've got tariffs. Someone's going to eat that tax. Could be foreign companies, but there's only a limit to that, depending on competition, right? It could be consumers having to eat it, or it could be companies having to eat well, the odds are it's probably going to be spread among them. No one knows exactly where, so there is at least a reasonable chance that corporate margins will come down in the US, if we're at an all time high in margins, which historically run between about six and 10% of GDP corporate profits. And so when we're in a boom time and corporations profits tend to grow, we're in recessions, they come down, and then things reverse, right? We get this reversion. We are way above the historical average, and now those margins come down. Interest costs are going to go up because the interest rates are now higher when loans roll over. You know, it seems likely to me, at least there's the risk that US profit margins could come under pressure, and when you're trading at such high multiples, you're trading almost as if you will, that the news is price for perfection is, I point out there is that risk. You don't have as much risk in the international stocks because they're trading at about their historical averages, right? These in the roughly 15 for developed and emerging markets may be a bit lower, and value stocks internationally are trading much lower, more like 10. So maybe we'll get a rotation to value, or maybe we get a continuation the last 17, where growth continues to outperform. So

Andrew Stotz 28:40
and that's interesting, because if you get a falling margin and a D rating in multiples, that's the double whammy that causes, you know, a fast crash, yeah,

Larry Swedroe 28:57
you know, just think, I think most people think there's at least a reasonable chance of a US recession, especially if they don't solve this tariff war situation fairly quickly. US corporate earnings on average, in the average recession, which is a GDP, fall of about 2% drop about 11% Yeah, well, if your profits drop 11% just from the recession, and then margins, I mean you, but profits drop 11% PES come down from, say, 20 to 15, which would still Be just average. PE, not like low like in 2008 we went into single digits. Well, you get a 25% drop from the PE multiple falling. You get another 10% or so drop from profits and margins falling. And you could see the market wouldn't shock me if you know. Well, we saw the market drop 30% or something, down to 4000 or some number like that. I'm not in any way predicting that, but if you get the trade situation continuing, or worse, we get problems with Russia or China decides to take advantage and invade or blockade Taiwan or who knows what, right? I mean, you know, 4000 wouldn't shock me at all. Yeah, and just

Andrew Stotz 30:27
to get that, to make that clear, let's say a company's profits start falling. What's going to happen is that, if nothing happens to their share price, then their PE is going to rise as the earnings fall. So when we talk about the actual fall in PE down, you know, to a more normal level, you're talking about a real serious fall in price.

Larry Swedroe 30:53
So that's what happens, because the PE, the higher PES, are built on the expectation of fairly rapid growth in earnings. The market was expecting going into this year, a 13% increase in earnings. Well, if you get it instead a 10% drop, well, that's a 24% difference, roughly, and that's just the earnings going down. And then you have to say people are certainly going to demand a bigger risk premium because things are more uncertain, and that's how you get big bear markets. Again. I really want to emphasize I am not predicting anything here. I'm just pointing out that your financial plan should include the possibility that that should happen, could happen, and if, if if you couldn't take that loss, or you panic and sell and you wouldn't sleep well at night, then you're taking too much equity risk in the first

Andrew Stotz 31:48
place. So to follow up and wrap up on the the data that we talked about, about the number of companies that had negative earnings according to data that I'm finding as of 2024 within the s and p5 106% of companies are have negative earnings, meaning they're losing money within the Russell mid cap, as you said, it's it's more than that. It's 14% but as you also said, within Russell 2000 the latest number is 42% which is up from 14% two decades ago. What's going on with the Russell 2000

Larry Swedroe 32:27
Yeah, it's a lot of these companies that are story stocks that you know have raised capital, spent a lot of money on investment and have not yet turned profitable. And investors seem to like, you know, these, what are called lottery stocks, but the more profitable ones, which were not trading at high multiples, the private equity firms have come in and bought them up and taken them private, or they've been acquired by big companies who were using their cheap, high priced equity to buy lower price, you know, profitable companies, yeah.

Andrew Stotz 33:05
Well, what a great discussion again. And I look forward to the next chapter. The next chapter is chapter 36 fashions and investment. Follow me for listeners out there who want to keep up with all that Larry's doing, you can find him on x at Larry swedrow, you can find him on LinkedIn, and you can also find him on sub stack. Now this is your worst podcast host, Andrew Stotz, saying, I'll see you on the upside. You.

Andrew Stotz 00:03
John, Hello, fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And I want to thank you for joining this mission, especially those who are listening in Mexico. Hmm, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I am here with featured guests, Mike Koenigs, Mike, are you ready to join the mission? Yes,

Mike Koenigs 00:41
sir, I am locked and loaded, and I'm ready to autopsy my seven figure scars. So risk takers dodge the bullets.

Andrew Stotz 00:49
Okay, that sounds exciting. We are going to get into that and a lot of other stuff. So let me introduce you to the audience. Mike is a serial entrepreneur with five successful exits, a 19 Time Best Selling Author and a top strategist for founders post exit, he helps build powerful personal brands in just one week, and pioneers generative AI for executives speaking at Elite Events like abundance 360 MIT and Tony Robbins gatherings. Mike, take a minute and tell us about the unique value you are bringing to this wonderful world. Well,

Mike Koenigs 01:24
after building and selling my businesses, I realized I love creating and launching them, not running them. So right now, we build and launch businesses and brands in less than a week that go from zero to seven figures in 100 days. We've done over 100 in the past seven years so, and then I also have an AI company, and we train executives all over the world on how to use AI in their businesses.

Andrew Stotz 01:49
Well, I can imagine that a lot of people want you know what you are doing. And I thought one of the interesting things that I thought about was I have a product or service that I've been in the process of building and launching, and maybe I could ask you for some advice, and my listeners and viewers would be able to gain from that. What do you think about it? I

Mike Koenigs 02:12
love it. You're ready to do a little bit of rapid fire. I'll walk you through a framework that I use, that I believe can solve any business problem, especially when you want to create and launch and become an expert and authority and be known as what I call a category of one brand. Okay, so

Andrew Stotz 02:27
then, why don't I just briefly introduce what I'm been doing and what it is? And then, yes, why don't you take it over from there? How about that? Yep.

Mike Koenigs 02:34
And then I'll ask you a couple of questions, and you'll just go, boom, boom, boom. And from there, I can give you some advice on what I'd do if I were you, and what I've seen work over and over again, also what I wouldn't do. Okay,

Andrew Stotz 02:44
fantastic. And then we're gonna get into the question of my worst investment ever. So for those who are listening and viewing, this is a chance to think about your own product and service, and how could you map it into this product or into this process? So let me explain what I've done. Basically, I had a business in Thailand. I still have it. It's 30 years old. It's a factory, and it's coffee factory, and we did pretty well up until about 2016 and then I made a mistake, and I let my accounting and finance slide, which was crazy, because I'm a finance guy, but we were expanding so quickly that our accounting system couldn't keep up, our accounting team couldn't keep up, and then we lost control of the accounting, and our margin went from a very high, strong margin down to about 1% in 2019 so what happened in 2020 COVID? Our worst revenue months went down. Revenue went down 80% prior compared to prior revenue. We had 100 people, we had a factory, and we had to come up with a lot of cash to make sure that we could survive it. Now, we survived it, and through the work of my best friend and business partner, Dale and his team and myself, we got it out of that crisis, and we managed also to maintain our shareholding ownership levels in the company. We didn't lose our position in the cap table, which is basically 40% each, and so. But then I needed to help the company really get out of this problem, solve the profit problem, generate a lot of profit, so we could rebuild our cash levels, pay back any debts that we had, and then really build a cash, a lot of cash so that we could really invest for the future. And I did that by basically creating the profit boot camp. And it's a 12 month program. It's for mid size family businesses to help them double profits in 12 months, guaranteed, if they don't double their profits in 12 months, I return their fees 100% and basically what I did is I put the management team through an intense program of learning and implementing, and as they learn every single week, and I have a discussion with the team. I meet with the team, and I hold them accountable for staying on top of the material and implementing. It's almost impossible that you don't double your profit and. That's really what I do. And I do that for family businesses in Bangkok, where I go out and work with the team and all that. But about six months ago, there was a guy that really challenged me to say, you need to make this global. Because I believe that, you know, I also have another course, an online course, that's a global online course called valuation master class, and that I've had more than 1000 people go through it, and I've done 20 iterations of it, and I know how to deliver the back end of the profit boot camp. And it's going to basically be similar instruction. So I'm ready to launch globally. And there's a lot, lot in place. Everything's in place now, but boy, would it be interesting to map this into your framework.

Mike Koenigs 05:39
Okay, so I'll set this up a little bit before I ask you the questions, and I'm going to show my screen, and then I'll walk everyone through who's listening. After I sold my last company, I went through a little bit of identity crisis myself. I had started my first real company was one of the first digital marketing agencies. It was called Digital cafe. The second and third were software companies. We had push button marketing systems early SaaS for generating SEO. It's called traffic. Guys are an instant customer. I created one of the first two way interactive mobile text marketing platforms. Exited that and then another one called you everywhere now, which helped businesses and business leaders write books, become best selling, authors build their personal brands, which multiplies the value of everything they touch for the rest of their lives. All of this will blend in, and then in between, there are a couple other companies. So when I went through my process, I wrote a book. It's called your next act, and we'll make sure we give everyone a copy of that, but inside it is a framework that allows you to multiply the value of everything you touch for the rest of your life, but also really get clear on what you need to do. So this is where I'm going to share and show off my screen, and then we're going to walk through it. I'm going to ask you which of these, what the answer is to each of these. So the first and most important one is, what do you believe and what does your brand believe? These are your non negotiable personal and brand values, also known as mindset. So if I said Andrew Stotz, the profit boot camp, what does this stand for? What do you believe? And what are the hard lines of where you say you think right or you don't think right what would show up for you? What declarations are you willing to take and make?

Andrew Stotz 07:25
Profit solves everything, okay? And loss destroys everything.

Mike Koenigs 07:39
I love it. That's a great place, and it's concise. And the way I always frame this is Steve Jobs started Apple Computer, arguably at any given time, one of, if not the most valuable companies in the world. He's been passed for a long time, but Apple stands for something. But I have to if I asked you who the CEO is of the car you drive or own, or the jewelry you wear, or the cable company you have. Most people would say, I have no idea, and that's because the brand doesn't stand for anything, whether you like them or hate them. Elon Musk stands for something. Okay? He's the only guy talking about going to Mars and actually making it happen. So that leads us to the next which is, who's your market? Who do you want to be a hero to what we call your ICP, or ideal customer profile? So if you are going to summarize who is the profit boot camp for who's your perfect customer, and who do you want to attract and who do you want to push away?

Andrew Stotz 08:36
So there's three elements to my perfect customer. It must be mid size, yep, which means revenue, revenue above, okay, $10 million per year. They must be a family business, and they must be in pain and want to double profit.

Mike Koenigs 08:59
And if you are going to identify the core pains that they typically are experiencing. They might be what

Andrew Stotz 09:05
cash flow crunch being crushed by competitors, not having the cash to invest in research and development to build a lasting business, and the final one for family, is the risk of having no legacy for their kids.

Mike Koenigs 09:28
Awesome, that is clear as a bell, and it'd be amazing right now, what you'll see is we can take this data, drop it into an AI, like there are a couple of agents that I use, and build out an entire marketing plan and go deeper and also identify who your core competitors are and effectively synthesize or grab their benefits and make yours better.

Andrew Stotz 09:52
Let me speak to the audience for a moment. And you know, one of the things that I find having taught for 33 years. And asking questions about, what are your goals, and things like that, is that the majority of people never achieved their goals because they never clarified their goals, 100%

10:11
and so that is precisely why we do this. Yeah,

Andrew Stotz 10:13
in this process, what's helped, what it helps for all of us is, and you should be thinking about it for your own business, your own products, your own service, or you personally, what do you bring to the table? And I would add one last thing that I ask people, which is, what is the highest value you can bring to the situation?

Mike Koenigs 10:32
It is great because that's number three, which is the model, your brand promise, your offer, and how you make dollars and frameworks create freedom. So your brand promise is, when you work with me, you get blank. What is it? So

Andrew Stotz 10:47
I help mid size family businesses double profit in 12 months, guaranteed.

Mike Koenigs 10:53
Fantastic. It's a great brand promise, even if, if you could fill in the even if, even

Andrew Stotz 10:59
if they feel overloaded at work,

Mike Koenigs 11:06
fantastic. And then you make money. Obviously, you effectively say, and do you have a guarantee or risk reversal involved? Or you just say, risk you on illegal for it. So

Andrew Stotz 11:16
the risk reversal is simple. We work together for 12 months with sincerity, obviously, and if you do not double your profit at the end of the 12 months, I will refund 100% of the money that you've paid. The risk reversal. But I would say the promise is and the reason why I only work with mid size family businesses is because where I can add the most value is, let's say you're a mid sized family business, and you're making $5 million in profit, and you know you have a much higher potential. If we can double that profit, I've now helped you create an additional 5 million. What is that worth to you? But more importantly, if you're listed in the stock market, or you want to list in the stock market, or you just want to exit at some point, I've done excellent academic research that helps us classify companies by their level of profit margin, and I've been able to say that if you're at a low level profit margin, your Pe is going to be x, and if we can move it up to the next category, your Pe is going to be x plus, so therefore we can double profit, but potentially triple value.

Mike Koenigs 12:34
Fantastic. Well, that leads us to the fourth which is the message the transformation. So specifically, in your sales copy, you are effectively saying you must believe this in order to even talk to me, get past the barrier, the border. And this is what we believe together. It's a tribal calling. That's the mindset the market. You've defined who you want to be a hero to. The third is the model, what your promise is, what you get. You're clear about that, 12 months profit, outcome guarantee. The message is the transformation you're promising, which you've pretty much already covered and just again, yeah, go for it, please. When

Andrew Stotz 13:13
I was 16, I was battling addiction, and I tried to kill myself a couple times, luckily, very poorly, yeah, and good job, yes. And I went through three different rehabs, and I hit absolute bottom. And at the absolute bottom, it allowed me to rethink everything about myself. And through 12 step program, I was able to recover with the support of my family and friends. And at the age of 18, I basically had stopped drinking any alcohol or taking any drugs, and for more than 40 years, I've been on that journey of transformation, personally. Secondly, in my company, we did great, but we left ourselves vulnerable, and we were seriously hurt during COVID, and I had to transform my company's mindset from loss and scarcity to high value, high profit margin. And we were able to take our profit margin coming out of the COVID crisis from about 2% up to our last, let's say five months, it's been about 10% and that transformed everything, money in the bank, confidence, strength. And that's what I can deliver to those people in pain that are ready for that transformation.

Mike Koenigs 14:37
I love it. So as I like to say, the promise is always Well, ultimately, it comes down to the Holy Trinity. Get Paid, get laid, live forever. So every business, product or service is a combination of a better life, which is, invest in this. You'll make more money, or I'm going to increase your expert status, your authority, your attractiveness. Beauty is beauty products free. So. Example, or increased health and longevity. The combined number of those, of course, is a better life. The Holy Trinity is when you strike all three and the venue, the way to get to people is you got to entertain them first. First. You've got to have reach. You've got to have attention, getting skills you've got to collapse the Speed of Trust and get someone to the point of the conversion. So the typical mediums we're already on a podcast right now. So it could be social media, can be print, it can be speaking from stage or whatever. Aside from podcasts, what do you believe your market pays the most attention to? What media channels will they access that have the highest probability of you being able to get them into your sales funnel, have that sales conversation and bring them in, and collapse that Speed of Trust, do it quickly. So

Andrew Stotz 15:53
I think for all of us listening and viewing, this is probably the challenge, most, hardest one, for me, the marketing channels, but I'll explain what I'm doing right now, and then let me let and then we can take it from there. Basically, because I focused originally on Bangkok, and I'm known in Bangkok, I have 11 modules in the profit boot camp. And what I do is I do a series of lectures that are really workshops in Bangkok every two weeks, and they're called the in three hours series, and in three hours, I cover each of the modules. So there may be a module on sales, there may be a modules on leadership, and I'll cover that in three hours, but it's really actually only about two hours of content and then interactions in this community of people that are trying to improve themselves. That gives me three hours of face to face contact and always having I have a passport so they can get a stamp, they can come to the next one. They can build their knowledge, and also they build understanding of what I'm doing, and they build trust in my ability to deliver. And that is a very simple channel that I go out locally. So the next channel that I need to go out on, I'm not exactly sure. Is it YouTube? Is it LinkedIn? Is it podcasts, as I go global? I'm not exactly sure. So that's my answer to this one.

Mike Koenigs 17:13
Great. So here's what I would do if I were you, and that is, first of all, I get on as many podcasts as I can that you know your listeners are listening to. So you can do deep research with chat, GPT or any other platform and find out what other podcasts have a high listenership of your ideal audience. The next one is anyone you'd create channel marketing partner opportunities and what I'd look for, and this would be a little bit of searching. Typically, when we're doing it, we come up with at least 100 channel partner ideas. And what I'd look for is anyone who already has those people as clients. It could be CPAs, could be professional services and financial

Andrew Stotz 17:55
advisors, lawyers, many, many places that we've looked at that definitely is part of it, and part of what I've done is, when we bring the highest value that we can bring to a situation, we can charge the highest price, and when we charge the highest price, we then have revenue to share, to be used for the marketing and sales process. And I make that very clear in my marketing material, my material describing the thing is that I use people to help me reach you who are in pain.

Mike Koenigs 18:25
Yeah, and you may find, like, if you could identify, let's say, 10 financial advisors or people who would be perfect guests on this show, that would be a great outreach. It's sort of like, Hey, I found you. You look like a respected authority. I'd love to talk to you on my podcast, and then, you know, either be afterwards, there's goodwill is developed, and it'd be like, Hey, I've got an opportunity to help make you some money, increase the value of the quality of the relationship you already have with your clients and customers. I will help them increase their revenue, which helps you. So this is a beautiful collaboration you could create, yep, and building materials that elevate both of you is what you want to do again. Your promise to them is more money, elevated status and authority. You're going to be more attractive to your body and attract even more clients and customers. And, oh, by the way, you can buy a lot more health and vitality and longevity with that extra money we generate. And we're gonna have fun. Yep,

Andrew Stotz 19:22
and so for the listeners and the viewers out there, we've gone through mindset, market, model, message. Now we're talking about media. And I just want to mention that, you know, some of the listeners and viewers don't have podcasts, and they are great ways to reach out totally one of the things that I love about my worst investment ever is that it's an odd request to get in your inbox. It's not a common thing. Hey, why don't you come on my podcast and talk about how great you are? Yeah, and so, but for the listeners out there, I would really, you know, recommend that you think about, if you say I don't know how to outreach and stuff. Podcast is a great way. You got to come up with your your method. Now I am thinking. About, and I've been working on a YouTube channel with the profit boot camp videos and story and ideas. And then after that, what I want to do is marry it with podcasts. And the idea being I will give lessons every week how to double your profit, and then I'll share different ideas, and I'll share all the information that I'm doing in there. And then I'll bring in two things. I'll bring in people who are doubling their profit, and, you know, case studies that I have. And the second thing I'll do is I also, because I'm a big part of my work, is to look at listed companies in the stock market, identifying companies across the world that are going through a transformation in their profitability, and asking their CEOs and their owners to come on the podcast and discuss, how did you do it? And so those are some of the ideas on this. So let's continue on. What is the number

Mike Koenigs 20:49
six are multipliers. So over the course of my career, which now is, believe it or not, 40 years, I have built an enormous library of strategies to get the attention of right fit customers. So I'm going to tell you about a couple of them. Some of them are what we call shake the trees campaign. So if you've ever had clients or customers, you've always got some people who didn't buy. The best thing to get in front of someone is something new. If you've got existing customers, you want to sell them. That's better, faster, cheaper, or another thing that you could do, for example, I have this technique. It's called the $1,000 cup of coffee. Now, the way I get people into my sales funnel, which is very replicable, is whatever the outreach is, they can I sell a little program. It's called the superpower toolkit, and what it does is it's a $37 report that is actually the summary and a detailed combination of some of my best books and techniques. And it's just a low cost info product, okay? And from there, it upsells that audience into a low ticket program, which is actually my framework that we charge $180,000 for. But it's a do it yourself product. So if you had to do it yourself, self paced program, and some people are like, No, I just want it. I want to do it. Have you do it for me? Yep. So that's how we stair step. But in between, I have something called the $1,000 cup of coffee. It's a skin in the game strategy. So when I'm talking to high value executives, they're like, I don't I just met you. I'm not going to stroke a check for six figures, but I'd like to find out what you have to offer. So my guarantee is you're going to get 10 times your investment value back in 10 minutes, because we do such deep research on you. So we use a couple of AI tools to do deep research, and in 30 minutes, I can promise I will help visualize a better version of your future self and show you how to make it true. I believe you could model that exact funnel for you, because you've got the system, you've got the process, it's a year long. It's a big investment. But what if there was an easier way to take a little bite first, so as soon as you've got your three hour workshop nailed and recorded, that could be turned into a special report, and with the help of AI, we actually build those in a day, you know, a complete marketing plan based on someone's vision and their knowledge. So those are just a couple of the multipliers. Like I said, I've got a library of 50, and some of them I talk about this is the shameless plug that will give away my book your next act for but that's at least the framework, and I have found over time, anytime I ever get stuck trying to solve any business problem like yours, you'd be the kind of guy we could workshop and build your entire marketing campaign and your process probably in one to three days. Yeah, and that is because there's always something to get back to. Yeah, there's many more.

Andrew Stotz 23:58
What I do like is that, you know, I have a lot of content, and I'm constantly improving that content, developing it, and therefore repurposing that into a research, you know, a report, a book, this, that is always something that's, you know, valuable so for the listeners and the viewers out there, you know, I think this is a great masterclass in, you know, how do you build a business, and what's your proposition, and what's your who's your target client, and what are you offering? And I think this was a great exercise. So Mike, I want to thank you for walking me through that. And I, I think we're going to have some great discussions after this call, how I can learn. So I want to put a link in show notes, you know, of what you guys do and all that on, you know. So just for the listeners out there, I'll have a link in the show notes that you can click on to go get in touch with Mike, get his resources, go through some of the stuff that he's talking about. Is there anything you want to any. Least you want to send people for that right now.

Mike Koenigs 25:01
Yeah, it's just my name, Mike koenigs.com, M, i, k, e, K, o, e, n, I G, s.com, actually, I'll use a shortcut link. It's paid for life.com/free. Okay, and that's a copy of your next stack book. And if you want to use AI to help do this, because there's AI tools that'll help you write books, create content and leverage it's at ai accelerator.com/free, fantastic. You'll at least get to witness some of these tools and resources for yourself. So thank you for that. I appreciate you giving me the plug.

Andrew Stotz 25:33
Yeah, no. And I appreciate you taking the time. And I love your energy and your expertise. Now it's time to share your worst investment ever, and since no one goes over their worst investment, thinking it will be, tell us a bit about the circumstance of leading up to and then tell us your

Mike Koenigs 25:47
story. All right, so I'm going to let you choose from one of three, or we can rapid fire through three. So one of them was a really powerful coffee brand. Interestingly, that was world famous. I know the founder and owner really, really well, and a combination of bad circumstances failed, but it was over a period of 10 years. Okay, so the second is a solar company that also I put a substantial investment in, and I know the founder really well, but the combination of pivots, bureaucracy, state law changes have caused it to stall, also, over 10 years now and then the third is a SAS roll up. It looked like an easy Sure thing that had two previous exits, and there were founder fights that have left it in shambles. Also, I can't take the loss because it isn't dead yet, but it also looked like it's a Ponzi scheme. So which one do you want to dig into? I thought I'd give it a choice. I'm

Andrew Stotz 26:49
going to AX the solar one because I just think that's, you know, the government and all kinds of other stuff that can be a mess. So that's that one. And I kind of like the coffee one because of my own coffee connection, but the SaaS one sounds interesting, too. So I don't know you pick the one of the two

Mike Koenigs 27:03
great well, we'll do the SaaS and the coffee one. Just look it was. Bottom line is, founder had everything going for him. Great personal brand, everything stacked. But combination of COVID started sizzling things, but also infighting with management and other shareholders, and never get kicked out of your own business. But we'll hit the SaaS. Here's the setup. Found out about this from a client who I'd spent time with. I got to know like and trust him, and he introduced me to this deal, and I actually helped him with his own pitch package, which sold deals like this. So it looked great, and I put in a substantial amount of money, and then I doubled down, because it got even better. And the basic premise was, it's a pool. The would go out and find SaaS companies that already had clients and customers, momentum and technology had a bit of a moat. They had to meet certain criteria, and because they had a package of them, round six, this helped eliminate, or at least lower, the probability of something failing, and the chance of potentially a unicorn, because they had had so much experience and so many successes, you know, multiple, I mean, as much as a 10x payout to investors in three years in multiple cases. So looked like a sure thing. Unfortunately, what happened? Big infighting. Both founders start going at it. One of them locked the other one out. Everything stops,

Andrew Stotz 28:30
and this is the shareholding of the founders at the time that that conflict was going on,

Mike Koenigs 28:34
enough that we as investors did not have 50% say in this so,

Andrew Stotz 28:43
so they had a majority, and were they equal? Or were they not? Yes, they

Mike Koenigs 28:47
were equal, which made it even worse, which is another thing you always got to make sure that it isn't equal. In fact, it's best that there's a third party. They tried to negotiate. They got legal. They start emptying the coffers, one of them, the remain Remainer, remaining founder who locked out the other founder, shut him down out of everything, someone who was doing the books became a whistleblower and said, there are shenanigans going on. I have proof that this guy is siphoning off money, building a house, going on super big trips, private jets everywhere, flights to Dubai. It got uglier and uglier and uglier, and the shareholders filed lawsuits. Got the SEC involved. I mean, it went downstream.

Andrew Stotz 29:32
Was it listed, or was it in process of listing? Or what? Yeah, not

Mike Koenigs 29:37
listed in the process. So, no, it's FTC, sorry, not sec, rather, yes, thank you for the correction. Bottom line is, so what if you file a lawsuit? You know how long it takes for everything to get out there, and how little of time your money lasts? So years have gone by. Now it's still locked up. We're getting no financial reports. This Excuses, excuses, and this guy's turned out to basically be a gigantic scumbag. And I trusted my the guy who initiated this deal. I love him. He's a great guy. He's got a long history of successful investing. But all of us, all of us got suckered in to the quick and easy money, and in this case, multiple successes. I mean, there was no indication other than I kind of felt like, Yeah, this guy kind of feels a little bit something, but I didn't listen to my instincts. So

Andrew Stotz 30:37
let's review the lessons that you learned. Yeah?

Mike Koenigs 30:41
So one of them, here's a big one that all three of them face time kills deals, okay? So if, if, anytime you know some, I've never been in a deal that didn't take twice as long as the projections, okay, over that period of time, laws, regulations, bureaucracies, change, partners don't get along. So I'd say that's the big one. And character does not equal charisma. Character is bigger than charisma, so crooked founders will gut you faster than any market downturn. And I'd say the other big lesson I've learned is if I would take all the investments I've ever made, which have been a lot in angels and startup deals, statistically speaking, they don't work out. I would have been better off when I started investing 20 years ago, to put all that money into index funds and let it compound. I don't do any angel deals, any startups anymore. I invest in property. I do have crypto and in my own personal brand, because that's the greatest multiplier you can ever make, is your own business, and then take a chunk of that aside and stuff it in index funds, ETFs, and continue building that brand, because that's what gets you past the velvet rope.

Andrew Stotz 31:59
Okay, so my and my takeaway too, as I'm listening to that, is the only way to invest as an angel investor is to invest in 10 startups. Yeah, and if you are not prepared with the money and the time to do that, don't do it, because most of them will crash and burn. And if you have the money and the time to do it, and you build a network of other people that are investing, and you get into these things, and you've got 10 or 20 of these, that's a different world for all those people out there that thinking, I want to invest in a startup. This is mistake number six of my six most common mistakes is investing in a startup, because you will lose everything, and you will have a dream that you won't but in almost all cases, and even if you survive. And here's an interesting statistic, Mike. I talk about it to my in one of my classes, I basically go through the number of businesses in America, which is a huge number of businesses, millions and millions of businesses. And then I say, but most of them are one man show or less than 10 employees, and then most of them have a small amount of revenue, and most of them have this and once I go through that, I end up with about 10,000 businesses that matter in America. And what I also say is the goal of your business, ultimately, should be that you're paying dividends in the future. And out of those 10,000 maybe it's 6000 or 5000 that are paying consistent dividends. So when everybody says there's, you know, 50 million businesses in America, sorry, there's only about 5000 that are successful and paying consistent dividends to their owners. And that is shocking, and it's something that we have to keep in mind, you know, out there. So anyways, is there? Let me ask you, based on what you learn from this and what you've continued to learn, what advice would you give for the listeners who are facing the same exciting opportunity. What is one action that you'd recommend they take to avoid suffering the same fate?

Mike Koenigs 34:07
Yeah, so I've invested in, at this point, dozens of deals, and the key thing is, unless you're a full time VC with deal flow, customer channels or an exit mapped, keep your money in things you can control. All right, if a founder can't show and this is what I these. These are my criteria. If I were to invest in more businesses a they already have to have customers, or they have to have relationship with someone who's got a channel two customers, and one of the investors ha already has them. They're basically saying, I want to multiply my wealth by giving you a bunch of customers. So it's a shortcut. It's and then the other one is they need to know who the buyer is, and they'll be like, we'll figure it out. And be like, Nah, you got to have a relationship with a buyer, and you've got to show them you've got to activate their greed glands by showing them that if they don't buy now the price key. On getting higher and higher when you're

Andrew Stotz 35:01
saying the buyer, the buyer of their business, of the business. In other words,

Mike Koenigs 35:05
if you're a shareholder, your best exit is for a big company to come and buy what they believe is money at a discount. Yep. And that is, and that usually is, a private equity firm before it becomes a publicly traded company. You know the PE firm is going to sell to them. So you got to, I just wouldn't deal with anyone who's not a sophisticated business builder, because the chances are, like one in 100 not one in 10 and and life goes by fast. No, yeah, it's like one day you wake up and, damn, I just turned 59 so exactly, I was 27 not too many days ago, exactly. So what's a resource that you'd recommend for our listeners? Okay, so we covered you know this is definitely pour into as many podcasts and resources as you can to learn how to build a personal brand that'll elevate everything you touch for the rest of your life. So one of the good things, if I had a good investment strategy, I get into deals now, because I can go in and someone wants to also give me shares or options, because I have a substantial reach and following, and I have a capability to multiply the value of the businesses I get involved in, and so that means I can get twice as much for half the price. And anyone can do that and this. So, you know, part of my whole life has been building brands, and the shameless plug is my book. Your next act is a great tool to do that. The second one is, I believe that every business in the world right now that doesn't do physical stuff with a gigantic moat around it has 18 to 36 months to start using AI effectively. And if they're not doing that, you know, IP doesn't mean anything anymore. The only thing that matters is, what is the speed of innovation and iteration collapsing, the Speed of Trust, which is accessing customers who buy from you over and over and over again, and then reaching an exit and and so immerse yourself in AI, and I want to keep this on a positive note, but you've been warned, there is no moat that AI can't burn through quickly, especially in the future. It is literally a time machine, yeah, so dive in and learn it now. All

Andrew Stotz 37:29
right, last question, what's your number one goal for the next 12 months? Oof,

Mike Koenigs 37:33
so I am here right now living my wife and I have been living in Baja, California, Mexico, which is an hour north of Cabo for five months, where our normal home is in San Diego. We've also been building a home in Malaga, Spain. So our goal and we're also becoming EU citizens. So the whole idea of being international citizens, I believe entrepreneurship is an international language of peace and prosperity. It's continue our beautiful life of multiple locations and working with more entrepreneurs worldwide. I've been mostly north america centric, but I just love speaking and educating and training. So it's more of the same, but in more places.

Andrew Stotz 38:19
Great. I was just listening to Ron Paul and Daniel McAdams. McAdams talking about peace and prosperity on the Ron Paul Liberty report.

Mike Koenigs 38:27
It is, yes, I'm in very close alignment with the mindsets. And if I were a voting card carrying anything, it would be libertarian. Yep.

Andrew Stotz 38:37
So 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, and AI is getting me there fast. Right now, as we conclude, Mike, 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? Go

Mike Koenigs 39:03
out there, build your personal brand. You will get access to better deals faster at a discounted price. That is the best advice I can give someone. And that's

Andrew Stotz 39:13
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. You.

Andrew Stotz 00:02
fellow risk takers. This is your worst podcast host, Andrew Stotz from a Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story at episode 645, now Larry stands out because he bridges both the academic research world and practical investing. Today we're diving into a chapter from his recent book, enrich your future the keys to successful investing, and that is CHAPTER 34 bear markets and on unnecessary evil. And just to highlight Larry just wrote on his sub stack. If you're not subscribed, make sure you are Larry's sub stack, he wrote, with the sharp drop in US equities investors have experienced and the questions I've been getting about the drop, I thought I would update a piece I wrote back in 2008 explaining why bear markets are a necessary evil. Larry, take it away. Yeah.

Larry Swedroe 00:55
So we could define a necessary evil as something that maybe isn't pleasant, but is needed. And the most common thing I think people can relate to are taxes. You want to live in a country and have police and schools and, you know, Social Security and Medicare in the US? Well, we got to pay taxes to support that, as well as defense. So that's a good example of a necessary evil. And I wrote it that way because bear markets really are a necessary evil, or investors should think about it that way, because if stocks didn't experience the kind of bear markets that we have, investors would actually be very unhappy. So let's think about why that's the case. The most common, most important, the most basic principle of finance, is the relationship between risk and expected, but not, of course, guaranteed return. Right? So the more risk, the higher the expected return, which means, if risk is high, which means that there have been risk of big losses, then investors apply a bigger risk premium, which leads to the denominator in the formula of a Net Present Value. The numerator is the expected earnings. The denominator is the risk free rate plus the risk premium. Well, the bigger the losses have been, historically than that. People would think of equities as being more risky. So I point out in my article that the US has experienced, you know, four periods where the losses were greater than the 34% that we experienced in the US during the COVID crisis, which lasted just a month and four Days, from February 19 to march, 23 from January, 29 through December, 32 the market lost 64% from January, 73 through September, 74 it lost 43% from April, 2000 through September, 2002 it lost 44% and from november 2007 to February, 2009 it lost 51% now imagine for the moment that US equities The worst loss that ever had experienced was 10% clearly, investors would view equities as a lot less risky than it was even in the post war period. We've experienced nothing like the Great Depression, and so that's one of the reasons that the equity risk premium has come down, people are willing to pay more because they believe the Federal Reserve has learned from the mistakes of the 1930s when it tightened monetary policy in the middle of a Great Depression. We now have much better accounting regulations. We have an SEC which we didn't have before, and we have much better regulatory rules guiding the actions of corporate executives, much more severe penalties for breaking the law. So there's investors believe it's safer. So if you go back to the 1970s or so, the average PE may have been just 15, so maybe it gets to the 20 in a good period and goes much lower in a bad period. For the last 25 years in the US, the average PE has been over 20. And so people believing markets are less risky because the economic cycle risk has gone down. We haven't had a really severe recession, except for 2008 in the last, you know, 40 years. Okay, so think about if the worst recession caused the market to only drop 10% maybe investors would be willing to pay 30 times earnings instead of 20 times earnings. That would mean the discount rate would go down, the net present value would go up, so the price of equities would be higher. You don't change the earnings of those companies, just the discount rate. And therefore, instead of stocks returning, say, 10% historically, maybe they would have returned 5% and what if the worst loss had only been 5% well, maybe the price would have PE would go to 40 on average, right? So the point being that bear markets really are necessities to create the large equity risk premium that has been called the equity risk premium puzzle. Why have stock returns been so high when corporate earnings are nowhere near as volatile as stock prices. And the reason is, investors hate big losses. They don't like the risk that that creates, and therefore they demand the big risk premium. So the right way to think about bear markets is they're really good, especially when you're young and accumulating assets, and as long as you don't get fired from your job, you get to buy at much lower prices and get higher expected returns. They're bad when you're retired because you're withdrawing from your portfolio and you can't recover money that's already been spent, those assets are gone, okay? So the right way to think about bear markets is they are a necessary evil in order to create the large equity risk premium we have enjoyed in the last 100 years, okay? And therefore you have to make sure you don't take more risk than as we've discussed many times, you have the ability, willingness or need, to take risk, and as you age, your ability and willingness to take risk is probably going down, and therefore you should be lowering your exposure to the that economic cycle risk. And if you're young and you have a stable job, well, then you can take that risk. But if you're in an industry that is highly correlated with economic cycle risk, saying, home, building, construction, autos, etc, then maybe you should have a little lower equity allocation, or certainly a reserve of a significant number of maybe years two or three, at least, that you don't wouldn't be forced to sell equities at a time when they're in distress, and that's Actually the time you want to be a buyer, when everyone else is panic selling, because expected returns are now highest.

Andrew Stotz 08:27
Yeah. In fact, while you were speaking, I went on to Schiller's website to download his data and look at that. And I just, you know, went back to 1900 and made this chart. But here you can see, and of course, it gets a little meaningless when you look backwards, because the numbers were so small, maybe if I put on a logarithmic scale, it would look have a different meaning. But the point is here we can see in 2000 2000 the.com bubble crashed, and then we can see the 2008 bubble crashed, and then we saw the COVID crash, and now we're seeing a recent crash. So bear markets, ultimately, as you say, are a necessary evil.

Larry Swedroe 09:10
Yeah, they restore a larger equity risk premium. You know, the worst thing that happened to young investors was the bull market we really experienced from 2009 through 2024 because that drove the PE ratios way up and expected returns down just when you're investing. It was the best thing that happened to retirees, because their assets continued to grow, and as they withdrew, they weren't suffering because those assets kept appreciated. So you know, you really have to consider the stage you're in as well when you think about your asset allocation and

Andrew Stotz 09:54
the the although the economy in the stock market don't correlate. Um. So it is interesting to think about the bubble and the boom and the bust. I know Peter Schiff. I listened to him recently, and he said something that maybe came from someone else, but the point is that the recession is the cure. And what his point was, and I think it's very true is that when good times are here, all kinds of people enter every industry, until eventually very high returns get competed away, and then you have oversupply, and then you have the peak of a economic bubble. And then eventually what happens is the weak players get knocked out. And I would argue the reason why we haven't had a sustained recession for a long time is because the COVID period was like a flash recession that just instantly knocked out maybe 500,000 businesses in America and maybe 10 million businesses around the world boom, the weakest ones that may have had to die slowly were put to death. How do we think about the economy and the cycles in the economy versus the cycles in the bear markets, in the market?

Larry Swedroe 11:11
Well, yeah, you have to be careful about your comment that the economy and the stock market are uncorrelated. I think you would find that they are with a lag, because the stock market is forward looking. So it tends to go down before we get a recession, and it tends to recover when we get a recession right, maybe in the middle of it, because the market looks ahead and says, gee, the government is likely to enact fiscal stimulatory policies that will help recovery. The Federal Reserve is going to lower interest rates and ease monetary policy, and that will stimulate the economy. So the market actually tends to go up once we get through the early stages, possibly, of a recession. It tends to go down ahead of the recession because it's anticipating it, and anticipating, for example, that their excesses in the Federal Reserve is going to have to tighten monetary policy, etc. In this case, what we're seeing, just to discuss what's going on now, the market concerned about the uncertainty by a self imposed recession because of the uncertainty of Trump's war on, you know, on trade policy. In the other cases, all of the other instances were exogenous events. So we had the events of 73, four. We had an oil embargo. We had 2001 we had the terrorist attack. 2008 we had a global financial crisis. 2020, we had COVID. This is a policy induced one, which leads me to believe, if rational people, and I don't know how rational President Trump is, everyone will have to make their own decisions if the markets start to crash, that alone can induce a recession because of the wealth effect. All the uncertainty he's created has driven consumer confidence way down. That means they're likely to spend less. We don't see it right away. In fact, we're seeing the reverse, because people spent more in the fourth quarter, in the first quarter, to buy things before tariffs went into effect, and so they front loaded things. So the next quarters could be weak corporate executors, their confidence level is way down, so cap x is down. No one's going to build a plant in the US, because they don't know if the tariffs will be there or not. So until they know, right and the wealth effect with the market going down is another problem, because people will spend less and all the doge cuts, it's not just the jobs lost there, which is probably a very good thing get rid of bloated government, but there are probably two to three jobs in the private sector supporting every single job in the government sector. Just think about the hotels and the restaurants and the airfares, and, you know, the you know, cell phones that you know, and all that stuff, and the consultants and and everything else. So you're talking about hundreds of 1000s of jobs just seeing a bunch of the consulting firms, well known firms, have already agreed to slash billions of dollars, right? That's gotta slow the economy to some degree. Now, it may also help the budget deficits, which in the long term, would be a positive so

Andrew Stotz 14:50
in theory, the stock market is telling us we're in for, potentially in for a weaker economy. Well,

Larry Swedroe 14:58
the market is up more. Are uncertain, so the risk premium goes up. Whether we get the recession or not depends upon, you know, sort of read the tea leaves, and you can make your own judgment about this. My assumption is as follows, but I have to admit, I'm always humble, as you know, by making forecasts, I always tell people my crystal ball is cloudy. I don't change my investment policies strategies based on them, because I know I can't forecast any better than anyone else. And I tell people, despite how much you want to believe, that there's somebody out there who can predict the future, there's only one person who knows what will happen, and you and I will never get to talk to him or her while we're on this planet. Therefore, ignore forecast. But here's what I think is likely, or at least you know, better than a 5050 chance. I believe that the President watches the stock market as the gage of his performance, and he knows he's got a big election coming up, not that far in the future. And if you get a recession come the third or fourth quarters, that's going to run right into the election, the primaries and everything else. He's got such a thin majority he cannot risk it. So what he's likely to do is the following, I believe, announce very quickly major agreements on basic tariff trade policy, but he can't announce deals because it takes, historically, nine to 18 months to negotiate very complex deals which have much more to do than just tariffs but regulatory rules, safety rules and all kinds of barriers governments Throw up to protect domestic industries. But he could announce India and the US, or Taiwan and the US have announced a general agreement that we're going to go to zero tariffs on manufactured goods, and we're going to work on these five other things, and Taiwan has agreed to invest a trillion dollars in US manufacturing. And then when you get one deal, a lot of other people will rush, because they will want to not be excluded, and that'll set the stage. And people, then the market, will think ahead, and we will avoid the recession. If I'm wrong and Trump doesn't use the common sense that he should have, and this drags on, then you could see a recession, which means earnings in the average recession go down about 10% and PES could easily drop from 20 to 15. So you would get an earnings, maybe of 230 bucks or something like that for the S P, and put it just a 15 P, that's not a bear market even. And you're about 4000 on the S P, so I don't rule out at all a drop that could be another 20% from here or so. So a portfolio has to be able to withstand, you know, both the good and the bad outcomes, because we don't know which outcome is likely. I had

Andrew Stotz 18:35
a couple questions in the chapter. These are kind of, let's say quick ones, but you mentioned one thing where you said, from 1926 through 2022 the S P has provided an annual compound risk premium over one month treasury bills of 8.2% and an annualized premium of 6.9 so Let's say equity risk premium about 7% Yeah. Okay,

Larry Swedroe 19:02
that's because, by the way, the average PE over the 100 years was about 17, 1617, invert that, and guess what, you got an earnings yield of six to seven, which equates to about what the real return to stocks was. Andrew, you put up the current Cape 10. You want to show people what that is, and then we can invert that for them.

Andrew Stotz 19:29
Hold on, I let me get that second.

Larry Swedroe 19:37
It's come down some because the market has dropped, you know, close to 20% and it's rebounded a bit the last couple of days. Yep, I think peak to trop was down 20%

Andrew Stotz 19:55
give me a second, yeah,

Larry Swedroe 19:56
all I can tell you this while you're pulling it up the current. Forward estimate of earnings, which I think the earnings estimates are likely too high, especially if we get a recession, is about 20. So that would be an earnings yield of 5% so that would tell you the expected real return to stocks is 5% now not seven, but you still have a wide dispersion of possible outcomes around that cape 10 is not a good predictor of returns in the next 123, years. It's a reasonably good one over the longer term, like 10 years, right? It's about as good as we have.

Andrew Stotz 20:38
Okay, so let me pull that up one second. Put me to the test here. Larry had to calculate that one. Okay,

Larry Swedroe 20:51
there you go.

Andrew Stotz 20:53
So what we're seeing, for the people that are listening, we're seeing that the PE ratio looks like about 33 there. Maybe, yeah. So let's just say the recent peak was about 37 let's say and it's come down to about 33

Larry Swedroe 21:12
so 33 would be a 3% real return. You know that that's, I don't know how many people would take the risk of investing in stocks for a 3% real return when you can buy tips guaranteeing a 2% or so real return, right?

Andrew Stotz 21:30
Let's and let's just look at that from a, let's say, just a long term average, which we can see here?

Larry Swedroe 21:41
Yeah, I'd be careful. The long term average is about 17 now, but that's misleading, because of the reasons I mentioned earlier. In much of that period, there was no Federal Reserve, there was no sec, we didn't have gap accounting rules. We didn't have Sarbanes Oxley, all of these things which made equities less risky. So I think, you know, a more normal number might be the last, you know, 40 or 50 years, maybe, or last 25 and now you're looking at a cape 10, much lower. So I think, you know, still obviously 33 would be way above, say, 20 or or so. So we're still way above that. So

Andrew Stotz 22:35
let's just take

Larry Swedroe 22:36
P, the current P is much more in line with the last 25 years, or even a bit longer. So

Andrew Stotz 22:44
let's take the period of 1980 maybe, yeah, that's a reasonable one. Could say that with 1980 we definitely had the Fed, you know, being a much more active player. So now let's look at that chart again, and we can see that even, even if we did that, that's going to shift it up from about 17 times to about, what do we say 23 times, right? But still, yes, we're way above it, not as above as we were in the.com bubble. And one of the things about the.com boom or bubble was that we had a huge, you know, very small earnings and zero earnings for many of the largest tech companies. Whereas now those companies, even though they may suffer a bit, they're still super profitable. That's

Larry Swedroe 23:31
why you're not seeing the P the cape 10 at 45 you're seeing at 33 and if we got to remember, yep, you know, if you get that recession, which would be a self imposed one, because of President Trump's the uncertainties created, their earnings are going to come down, and then the risk premium will also go up, and that's how you get big bear markets. And so it wouldn't shock me. I'm not making that as a prediction at all, but wouldn't shock me if we sat here in six months and the S, P was 4200 because we had a recession induced by a failure to get trade deals done. And I would add, there are other things that are certainly possible. You know, there is tremendous geopolitical risk around the world, certainly Russia and Ukraine, certainly Iran. We could see the US, if US and Israel don't get Iran to agree to abandon nuclear weapons with a verifiable testing I believe there's a 98% chance or more that Israel and the US, or even Israel on their own, will launch a strike to destroy their nuclear facility. Who knows what that could trigger and Taiwan? On, given China's problems, if the US persists in this trade war, China could decide their economy could get into a serious recession, and they could be concerned even about being overthrown politically. They want to distract their population and launch an attack on to try to take over Taiwan. I mean, I'm not predicting any of these things, but I don't think anyone could say the chances of those things happening are zero. Yep,

Andrew Stotz 25:33
the last thing I want to ask you about what's in the chapter. It made me think about, when we talk about small cap, you know, we talk, sometimes we talk about small cap premium and small cap companies having a big loss relative to large cap companies and all that. I kind of realized that we need to differentiate when people, when we listen to people talking about small caps performance, we need to differentiate between just small cap return relative to, let's say, the overall market, or relative to large cap versus long, small cap short, large cap premium, right? That we're talking about the factor premium. How should we think about those two things, and what generally has been the difference. And can we really capture that long, short premium in small cap, or should we be thinking about just the premium of, you know, small cap performer? How do we think about that? Well,

Larry Swedroe 26:33
gee, we need a whole hour to answer that one, Andrew, but let's see if we can make it short. First of all, the small cap premium is really polluted, if you will, because of investor at the retail level behavior, retail investors have a weird preference. It's not financially rational. It may be psychologically rational to buy the stocks of small cap growth companies with high levels of investment and low profitability. They are hoping to hit the lottery, if you will, and find the next Microsoft. It turns out that stocks with those characteristics have underperformed treasury bills over the long term Cliff Asness and the team at AQR wrote a paper saving, I forgot the exact name, but saving the size premium by getting rid of junk. And once you do that, the size premium, all of a sudden is restored. We haven't seen a size premium basically since it was written about in the 1980s by Ralph bands. And it's polluted. Once you look at small companies that are more profitable, low their value stocks that are profitable, then there is a size premium, but you have to get rid of the junk stocks. Another example are stocks and bankruptcy. There have penny stocks. Do you know? Take a guess what percentage of these stocks, even though they trade, they are still in indices, you know, and stuff. So an index fund that's pure replicating would buy it. So a stock like hertz that declares bankruptcy, let's say it's traded. Take a guess what percentage of them ever return one penny to shareholders, is it 50% 80% 20%

Andrew Stotz 28:46
Yeah, I would say 40% return and

Larry Swedroe 28:51
60 times too high. It's 1% 1% and yet, people love this, right? Okay, so when you look at the small cap premium, people say there's no small cap premium. It's because you have this junk. And once you get rid of that, the small cap premium is restored, and it's been something on the order of two, two and a half percent per annum. And then you get a profitability premium on top of that, if you stick with the, you know, those companies, and you know, in general, there is that size, that profitability premium, so the it's very hard to capture it long short, because the worst performance guess what is in the short side. So you have to go short, and it's very expensive to borrow those stocks, because the risk of going short, like with hertz, who went way up, or GameStop, you know, the you can get squeezed by these crazy people at Reddit who want to go after hedge funds and stuff and so. That's what's called limits to arbitrage that allow these stocks to persist as overvalued. The way to access the premium, if you will, is to buy small cap stocks that are higher in quality, profitable and cheap, and go long them. And over the long term, you should have higher expected returns for very you know, because they are risky or smaller, less liquid, you know, companies right? And you'll outperform the junk as well.

Andrew Stotz 30:32
And just to show that, here's a chart I just made on let's see. This was something I did before, where I looked at a 10 year stock market moving average to smooth out the ups and downs and just to understand, but here you can see that the blue line is the small cap premium. That's the long, short premium

Larry Swedroe 30:56
ended right around 83 when Ralph bands published this paper, yeah.

Andrew Stotz 31:02
And so we had a underperformance, then outperformance and underperformance, which tells you, it's pretty much been destroyed and that

Larry Swedroe 31:11
Well, you gotta remember, much of this has occurred in the last 10 years, when the price what you have to analyze. Andrew, be very careful here you have to ask, Why did large caps outperform? Did they out earn? Which, in case, you could say, all right, that should persist. The small cap premium is gone, or did the PE ratios go way up? And much of that outperformance, perhaps all of it, is due to the spread widening. Small cap stocks are trading maybe 10 times earnings, and large cap trading at 30, so you get an average market of 20. I'm just making examples, and it's because the spreads have widened dramatically. That's certainly been the case in value stocks, and it's also been the case of US stocks outperforming international until this year, 80% almost of us outperformance over the last 17 years has been PE expansion, not earnings expansion, and much of the earnings expansion was due to interest expenses coming down when the Fed adopted a zerp policy. So that's going away now, yeah, and as those refinances come due, maybe people borrow 10 year money back in 2018, or 19, and you know, few more years, then they'll have to pay again market rates.

Andrew Stotz 32:44
Okay, so in wrapping up, let me just also mention that the paper you're talking about is called size matters, if you control your junk. Yeah, the latest green paper, yeah. Latest version came out in 2018 it's on SSRN, and as you said, Clifford Asness, Cliff so it and just to read the abstract, just briefly, the size premium has been challenged along many fronts. It has a weak historical records very significantly over time, in particular, weakening after its discovery in the early 80s, and it's concentrated among micro craft stocks predominantly resides in January and is not present for measures of size that do not rely on market prices, is weak internationally and is subsumed by proxies for illiquidity. We find, however, that these challenges are dismantled when controlling for the quality or the inverse of junk of a firm. Interesting, that's a great paper. Okay, I look forward to it. Well, let's wrap it up there. Larry, I want to thank you for this great discussion, and I'm looking forward to the next chapter. And the next chapter is chapter number 35 Mad Money. Now I don't watch TV, but I hear there's a guy named Jim Cramer we're going to talk about. So I'm looking forward to that.

Larry Swedroe 33:56
Yeah, it's an interesting discussion. It amazes me, given he's been exposed that he adds no value. He's been around for, I don't know, 30 years, and he can people still tune into his show when the academic research shows he knows nothing. Well.

Andrew Stotz 34:13
He may not add any value in his in our stock market performance, but apparently he adds some kind of entertainment

Larry Swedroe 34:18
value. Yeah, that he's certainly an entertainer, if you like, you know, clowns. Okay, well,

Andrew Stotz 34:25
we're looking forward. That's gonna be a fun one. So for listeners out there who want to keep up with all that Larry's doing, you can follow him on x and Larry swedro, you can follow him on LinkedIn, and maybe Larry you can tell us, what are you doing with sub stack,

Larry Swedroe 34:36
yeah. So I decided now that I have left Buckingham, I've semi retired, I still do some consulting to now eight firms part time, so I still want to write, and I have a lot more time to give back and help people learn about markets. So I write for. Four other websites, wealth management, financial advisor, Morningstar and alpha architect. So you could follow me there, or simply follow me on X Twitter or sub stack. So I'm writing more than the others are have the capacity to take so I decided, all right, I could publish on sub stack. It's free, you know, at least for now, and it allows me to add commentary like I added today about the bear markets are necessary evil. Rather than writing, most of my stuff is writing about the academic literature, reviewing what the researchers looked at, what they found, and the implications and takeaways for investors. This allows me to comment more on investor behavior and how they should be thinking about things in the marketplace. So I would urge all your listeners to check it out, and if you just subscribe and tell your friends, and hopefully that'll make you a better investor.

Andrew Stotz 36:04
Fantastic. And the great thing about sub stack is that you get a notification when a new piece comes out, where you may miss that on Twitter, you may miss that on LinkedIn, so that's great. Well, this is your worst podcast host, Andrew Stotz, saying, I'll see you on the upside. You.

Andrew Stotz 00:01
Hello, fellow risk takers, and welcome to my worst investment ever, stories of loss to keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And thank you for joining this mission, especially our listeners in sunny California, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Jeff Sarti. Jeff, are you ready to join the mission? I'm ready. Let's do it all right. Let me introduce you to the audience, Jeff, CEO of Morton wealth, leads a firm managing over $3 billion in assets with a mission to empower better investors. Jeff helps clients achieve their financial goals while supporting employees in their career growth. A CFA charter holder, Jeff shares his insights through his prospective newsletter. His emphasis, his expertise, emphasizes challenging the status quo and fostering long term, resilient investment strategies. Jeff, take a moment and tell us about the unique value that you are bringing to this wonderful world. Thanks

Jeff Sarti 01:16
for having me as a starting point. Be really looking forward to this as a starting point, just to put in context, we're a wealth manager, and like many wealth managers, we're typically, you know, the financial quarterback in a client's life, helping them navigate all of the financial decisions they face in their life, from retirement to tax strategies and straight strategies, you name it. That being said, our real differentiation is on the investment side. We look very different. And I'm sure we'll talk about the strategy of how we look different. But more than anything, it starts with mindset. I know that's something that you talk a lot about in your podcast and the books you write. Everything really is around your approach to investing in behavioral finance, and the term I like to use in terms of the type of clientele that we synergize with. It's a healthy skeptic. And maybe I'll start just even quickly saying what's not a healthy skeptic. You mentioned status quo in my bio. What's not as healthy skeptic? Most people are just comfortable with the status quo, right? What's worked in the last 40 years should work in the next 40 years. You know, let's say a 6040, stock, bond portfolio. Nothing wrong with that. And most of our industry caters to that. And there's wonderful solutions for that type of mindset that being said for more of a skeptical mindset someone our clients are typically against skeptics. So they tend to be very smart, they're curious, they're questioning, and they don't take what's thrown at them at face value. And so that shows itself in a couple ways. One is with regards to the markets themselves. Let's say the stock market. They have a lot of questioning and even some distrust of the stock market. Of course, they're going to invest in stocks, but to a lesser degree than most, for a few reasons, they view the stock market somewhat as speculative game, even a casino. You look at like the mean stocks, things of that nature. They question valuations. You know, valuations, to some degree, have, we believe, somewhat untethered from fundamentals, and even just the rise of passive investing, passive investment grade, in a lot of ways, but in so many ways, it's, it's, it's synonymous with mindless investing. And so I think they're, they have a lot of skepticism or question around that, but even more importantly, I think, around policies in general, they're skeptical government policy. Is this really a offshoot of 2008 more than anything else. They question the imbalances, the extremities of 0% interest rates, money printing, and now, in recent years, just the binge on debt that where they believe that, intuitively, maybe they're not economists or clients, but they intuitively believe that there's no free lunch and that there's ultimately going to be a cost to these types of policies. And so as a result of that, they're looking for something different. They're looking to build more of a resilient portfolio. You talk so much about managing risk, first and foremost, we and our clients strongly believe that. So that's the skeptical side. Now I'll just finish on why a healthy skeptic. The danger of being a skeptic too much is you can veer into sort of doomsday land, right, and just want to be doom and gloom, put your cash under mattress, maybe shorting the market, long volatility, you name. It easier said than done to pursue that strategy. I think a healthy skeptic. While they're cautious, they still, they want to participate, right? They want to be invested. They want to be long, the economy, the market, etc. They want to be in the game. But again, they want to do it in just a more thoughtful way than in just a standard, passive, 6040, portfolio. They want to build a more resilient portfolio. And that is the end result of this different mindset it is, is, it is a portfolio that looks meaningfully different, not minor not not to a minor degree, but meaningfully different than sort of a standard, 6040, traditional portfolio,

Andrew Stotz 04:53
interesting. So I think it would be fun to dig into what does meaningful. Different. So let's, let's first start off for the listeners out there that may not know that much about investing, and you mentioned about 6040 let's say that's kind of typical way people maybe benchmark, or think about maybe I'll have 60% in stocks and 40% in bonds. Now in my book, How to start building your wealth investing in the stock market, I always say 110 minus your age is maybe a good guide. In fact, I would probably, at this point in my in my life, say 120 simply because when you're 20 years old, you probably should have 100% in stocks, in the sense that you need that compounding happening and you don't, you know, what's the point of having bonds at the age of 20, when you've got, you know, 40 year time horizon, but the idea of 6040 is that okay? Once you get up to an older age, then you want to have less of the volatility and all of that. So for many people, they see two asset classes, stocks and bonds. Now, in fact, you could argue that, are they really separate asset classes in the sense that they're both coming from a company. Now you could say, okay, government bonds, you could argue is a truly different asset class, or, let's say, the cash flow is generated from a truly different entity. I'm just curious, so how do we think, if we don't think necessarily, 6040, what do we think?

Jeff Sarti 06:23
Great context you put, and I totally agree with you on the risk scale. Age obviously, tremendously matters of how much in terms of risk exposure you should have. But really, at its core, it's really thinking through diversification. And we use the word true diversification to describe how we think about portfolio construction. So starting with stocks, and let's say a standard portfolio might have 60 or 70% in stocks, that's all well and good. The challenge is, as we know, diversification works in flat to up markets, but what happens in down markets, especially really nasty down markets, without getting too technical, but correlations go to one, right? It really doesn't even matter what sector you're in. If you hit a nasty economic environment and or a bear market, all stocks will go down together. So that's sort of the 60% part of the portfolio. Now, what about

Andrew Stotz 07:11
bonds? And just go ahead. So this is an important concept of this correlation, and the reason why we're investing in different assets in different asset classes is because we're trying to take advantage of the idea that there is a minimal correlation between various ones. And when you say basically in times of trouble, correlations go to one in the sense that number one, you mentioned stocks. So let's just say you had two different groups of stocks that really have a low correlation. But all of a sudden, when everything falls, they all fall together, and then the correlation is also in relation to things like, let's say bonds, or maybe gold, like, you know, as an example, where you can see all asset class correlations, go to one which are you talking about? Both of those, or explain what you mean by that. Yeah,

Jeff Sarti 08:01
so starting with the stocks, that's a simple one, right? But then moving on to other asset classes, I guess the way we think about it is what drives movements up in asset prices or down in asset prices with most traditional assets, and it's really two main things. It's the economy. Obviously, a strong economy is healthy for both stocks. And you mentioned bonds, most especially corporate bonds, do well in a good economy, in a recession or tough economy, the opposite happens. That's the first thing. And then the second thing is interest rates. Interest rates just the most important thing that drive prices. We've been in such an incredible we're also spoiled right? Going back 40 years in really a declining interest rate environment, declining interest rates propelled all asset class, all asset prices, up, both stocks and bonds. So when we're looking for other pieces of the pie to mix in with our stock and bond portfolio, it is really looking at things that will behave somewhat unrelated to those two risk factors, both the economy. What things can do okay, can do well, no matter what direction the economy takes. Same with interest rates. What are things that can do okay, potentially even thrive if interest rates rise. So that's where we're looking at truly things, truly things that will behave differently. One last point I'll make, just going to the bond piece you hit, on and on the on the intro part of this discussion, a lot of bonds are actually more correlated stocks, because you're either taking equity in a company or lending to a company, so in both of those instances, you're correlated because you want that company to do well. But then there are other safer bonds you mentioned, like government bonds. Listen, government bonds were wonderful again over the last 40 years in a declining interest rate environment, but one interest once interest rates hit zero, I mean, it made no sense to touch bonds that had zero yield. Now, at least, rates have moved up a little bit. And you could get reasonably paid for buying something like a government bond. But the concern is, even with government bonds, are we in a new paradigm? And I'm you know, maybe the 1970s would be the best example, where inflation changes everything. Inflation is a game changer. Where can we be in more of a quasi, somewhat stagflationary type environment, maybe not the end of the world, but maybe sort of a slow growth environment, but coupled with inflation, where you not only have stocks that are challenged, but now bonds are challenged as well. So bonds that used to be that stalwart ballast of the portfolio that would move counter to stocks, maybe will go down at the same time, we had a little glimpse of that in 2022 both stocks and bonds got really hit hard. Bonds did not do what they were supposed to do. Our concern is no guarantee, but will the next decade look more like that than not? So

Andrew Stotz 10:52
there's two things I want to unpack in the first one you talked about, okay, economy and interest rates. Yeah, technically, let's look at the long term government bond. Let's say 10 year government bond. The composition of the interest rate is, in theory, a combination of economy and inflation. Yeah, when you're talking about economy and interest rates, are you really talking about economy and inflation, or are you talking about economy and interest rates? It's

Jeff Sarti 11:22
so you, you, they're obviously related. I now that you phrase it that way. Yes, it's more economy and inflation. And so we again, we've been so spoiled to be in a mild inflationary environment for most of our careers, lifetimes. We've never been faced the our industry at large, with a more volatile and or rising inflationary environment, where, on a real terms, one if interest rates rise, disastrous for bonds. But even if real interest, if interest rates don't go up, let's say they stay flat. Are you still making enough on a inflation adjusted basis? Because government bonds yielding three 4% Listen, CPI data. We all know inflation is really higher than what is reported by the government, not drastically so. But if you're going to make three 4% over the long run, are you really keeping up with inflation? We have a lot of doubts.

Andrew Stotz 12:21
And when we talk about, you know, you talked about the 40 year decline in interest rates, you know, if we go back to, let's say I graduated from high school in 1983 and you know, right then, Volcker had been squeezing, trying to bring interest rates down from 20% or so at the time. And you know, there was some amazing headwinds that we are never going to get again. And the first one was declining, let's say, declining oil price. Yeah. So we had 20 years of declining oil price number one, the second one was, we had about 700 million people enter the job market between China, Bangladesh, Vietnam and different countries. That all of a sudden, all of a sudden, when I left Ohio, where I originally grew up. I left Ohio in about 1986 there was, you know, there's a vibrant, you know, industrial base, yeah, that's gone. That's all shipped over to Asia, let's say in general, in China, specifically. And what we saw was that it was just impossible to be able to compete with this. 700 million people, low wage earners at the time entering the workforce. So between the combination of falling oil prices and the entrance of this huge influx of low cost labor, yeah, we naturally had a falling interest rate and a falling inflation environment. Now you could say, well, Andrew AI is the next thing that's going to bring us that deflationary, you know, a reduction in inflation. But I'm curious, you know where your thoughts are, because I did hear you on another thing on your LinkedIn. You have a lot of little clips, and I watched some of those. And you know, you talked about this idea of, you know, we had a once in a lifetime period of very low interest rates. But could we be wrong? Could it be that AI is going to bring us, you know, the same type of thing that falling oil prices and 700 million new people into the workforce did for deflation.

Jeff Sarti 14:36
Listen, without a doubt, AI is powerful, and I'm a believer in the technology and productivity can hopefully knock on wood grow as a result of AI. So listen, I'm a believer that being said, we strongly believe that there are more powerful forces at work. Work. A lot of it is around debt levels, the massive one comparing and contrasting us first, let's say the early 80s, where Volcker had a lot of guts to do what he did. That being said, we had such low levels of debt, he was able to do that. So he was able to crush those inflationary pressures. So beyond the dynamics that you talked about, Volcker was a big force in decreasing inflation too, because he was able to Jack interest rates up. It's not possible. We cannot do if inflation, if we get into wage price spirals, if it rears its ugly head, tariff issues we're facing right now. I mean, news just today about supply shipping collapsing out of China, just like literally today. I mean, there could be some real supply crunches here if inflation picks back up the challenges the Fed doesn't have room to massively raise interest rates. Why? Because our debt levels are just on a debt to GDP basis, astronomically higher than what Volcker was facing. Yeah. So listen, there's a lot of moving parts, pros and cons. AI is a great example of it that being said when we think about fundamentals and the biggest concern from a generational point of view that will drive inflation and growth, etc. It's that. It is that government debt we think it's utterly out of control and unsustainable.

Andrew Stotz 16:31
One of the ironies of America is, yeah, I've always been kind of amazed at how Americans are so comfortable with price controls on the cost of money, yeah, but they would never, you know, have be comfortable with price controls on, you know, iPhones as an example, or anything like that. It's just they've been so acclimated to it that it's just like everything hinges on that. Let me ask you another question before we get to the big question of the podcast. But the other question is, how many asset classes are there? For instance, the reason why I asked that is because, yeah, I read some research, and they talk about small cap value, and they call those asset classes, but I've always considered any stock as part of the equity asset class, and then bonds, both government and corporate, part of the, you know, the bond asset class. And then I can come up with commodities, and you could say gold, but truthfully, com, gold is a commodity, sure. So stocks, bonds, commodities. Now someone says, I end up with this private credit. Well, wait a minute, yeah, that's lending, yeah, it's bonds, yeah. So, just out of curiosity, you know, you're allocating all the time. What does it mean when people say these are different asset classes?

Jeff Sarti 18:01
I love that question. I'm going to talk about both sides of my mouth. So as a starting point, you as a starting point, as a starting point, I agree with you. Actually, even though we talk about lots of asset classes, at its core, there's equity and debt ownership, which is higher risk, theoretically some leverage to enhance that. Those returns or bonds you lend on different opportunities, and you're more in a more secure position. Now that being said, the limitation that most face with the 6040, Bond stock bond portfolio is the public markets are only a small slice of the total investable pie in terms of both equity and debt, and it's only through we found maybe there's little, little glimmers within the public markets, but generally, it's only within the private markets that we can find equity and most specifically, debt, debt structures. You mentioned private credit, that will just be very, very different than public bonds, different in a number of ways, covenants much stronger, much better in the way of controls. And most importantly, and we could talk more about our approach to lending, that's where the non correlation comes in the way the lion's share of bond corporate bond investors make loans, it's all based on underlying cash flow or earnings of the underlying company. That's all well and good, and we do some of that too. But when I talk about true, low or non correlation, it's being agnostic to the company you're lending on, and focusing on the underlying collateral, the assets, the assets that you can attach to. So if you're lending to a company, right? You hope the company does well, but that's secondary. The key is, what are you lending on? Are you lending on their inventory, their trucking fleet, their real estate, their cash? And if that's. You're lending on, and this is where our primary focus is on across a variety of industries, focusing on assets as protection, that even if things don't go according to plan, and that's something we strongly believe in. We're very humble in the way of we, we have no crystal ball. We embrace uncertainty, as opposed to trying to have predictions of what's going to happen to the underlying economy or the company we're lending to. So even if things don't go according to plan, knock on wood, we're going to be okay, because we have those assets to lean on. So

Andrew Stotz 20:33
let's imagine that all these private loans are tradable in the stock market, and you could compare the existing and so just for the for the listener and viewer out there that may not completely get that, if we think about corporate bonds that are traded in the stock market, they are, as you said, based upon the cash flow of the entity generally. And basically, that's the benefit of being a large listed company, is because your data is public and people are scrutinizing it, the banks can lend or, sorry, the entity can issue bonds based on cash flow. So now we have this whole set of bonds that are listed in the market that are pretty much all cash flow based, yep. Now let's imagine that there's also a set of bonds that are cash flow and asset based, let's say maybe not 100% asset based, but let's just say that asset, the collateral, plays a role in that. And so now all of those bonds, or, let's say all that lending is in the form of bonds that have asset backing. What we're really talking about now is, in theory, what we're talking about is lower risk lending, yep, to possibly to second tier, not in credit quality, but in, let's say, what is it, you know, because they're listed, let's say, because of the corporate bonds right now are mainly, it's transparency, let's say, but these are, there's more work involved and all that. Yeah, but now we've got this whole group of bonds that are backed by asset as well as cash flow, would those trade at an interest rate above or below the corporate bonds in general that are based only on cash flow?

Jeff Sarti 22:34
Well, I love that you say that because intuitively right, they should trade at a lower yield, because they're safer, without a doubt, they trade at a higher yield and meaningfully So, meaningfully so. And there's, there's some reasons for it. One is there a lot of these companies are they're not publicly traded, right? So then they're the thought is, oh, there's more risk in private companies. But again, many these loans we're making are not one to $5 million loans, there 10 to 50 or even 100 million dollar loans. So these are substantial companies. The other aspect is, I don't want to be completely misleading in that a lot of these companies are not listen if they were, if they were growing like gangbusters, they could go to traditional lenders and get cheaper debt. A lot of them are companies in transition, maybe going sideways. So there is some maybe hair on these companies. But still, one of the reasons it's that there's an supply demand imbalance in terms of the amount of lenders that are willing to make these loans is it's a lot more work if you think about a cash flow loan, like, let's say, Morton wealth, our company, we make nice, consistent cash flow we grow from one year to year. We're even a small company. We're not publicly traded, but if we need to get a loan, we could go to a local organization and get a loan really quickly. They would just look at our last few years of financial statements, bring it to their board and make a decision in a couple weeks, very different than, let's say, another company our size, but maybe didn't have consistent cash flow like we do, but had a huge trucking fleet. How do you value that trucking fleet? It takes a lot of work. You got to go verify those trucks. You got to go really understand the market. If you had to sell those trucks, what type of liquidity appraisers getting involved? It's a messier business that works to our advantage, because the lenders there, there's only specialty lenders that are willing to do that hard work. The end result is they can charge a higher interest rate. Okay,

Andrew Stotz 24:37
so let's compare the loans. Yeah. So let's imagine that all the corporate bonds out there that we could split them in half, and half of them were asset backed as well as cash flow backed. In theory, those bonds would trade at a lower return. But what you're saying is that, well, the because of the size and the challenge and the additional work involved. Involved in all of that, yep, and lack of transparency. So there's a lot more work involved to hold them accountable, and all that that, what you're saying is that the reduction in interest rate caused by having asset backing the loan is not offset. You know, it is you won't experience that lower return, because all of the digital risks, credit risk, as well as extra cost involved in doing it, will bring that return to be a higher return than what we would see from the bonds out in the market. So I think even, like, the

Jeff Sarti 25:38
simple analogy, I mean like, even like, even like, think about stock investing, passive versus active management, right? Passive investing is going to be cheaper, lower cost funds. It makes sense. Why? There's no work. It's easy, right? Name, the firm, BlackRock, can make a fund, and then tomorrow could be 10s of billions of dollars in assets versus active management, really hard, right? You got to hire analysts, a team, etc. You know, there's an extra cost associated with that. Similar, on the asset based side, it's just, yeah, it's, it's not so easy, except the different networks for benefit. On

Andrew Stotz 26:11
the asset backs, on the asset backed side, you're much more likely to get the upside, additional upside, the compensation, whereas on the active side is harder, just because the competition in the market. So I like this conversation, because a lot of times when people talk about private credit, yeah, in the end, what they really just talking about is they're not getting daily price quotes, oh, on that, and then, like, that's low risk, you know? So if a tree falls in the woods and no one hears it, did it actually fall? Well, of course, it fell. There's plenty of risk in that. It's just that it's not being priced on a daily basis. And so is that really risk reduction? I wouldn't say it is. It is vola price volatility reduction, but that's not really risk to me. Couldn't

Jeff Sarti 26:56
agree more. The private industry takes advantage of the lack of pricing, we all know that, right, and inflates risk adjusted returns, sharp ratios, that's all fake. I couldn't care less about that. That's not what I care about. What I care about is true. Downside, really, thinking through scenarios, downside, stress testing, what can break this loan? What? What can happen that, whether in the whether to the company or something out of control, the company's control. We're facing it right now, right with tariff related issues, geopolitical events, you name it, really thinking through downside again, you talk, I know got so much about managing risk. It's, it's the theme of your podcast, and so much you write about, that's our obsession. What is a nasty environment? And in a nasty environment, are we going to get our money back, as opposed to a cash flow loan, all well and good, until, if there are no backing of assets, you know what happens? Knock on wood. Maybe you could get back 80 cents on the dollar, 70 cents on the road. But you know what? That might even go to zero if, if the cash flow goes away, no interest in lending in those types of more extreme situations.

Andrew Stotz 28:06
Okay, so this is a great discussion, and what it comes down to is, so far, we've identified two asset classes, stocks and bonds, and within our stocks and lending, let's call it whether that's through bonds or whether that's through loans, and we've now clearly delineated number one, government bonds, number two, high quality cash flow back, corporate bonds, and number three, private credit, which is generally asset backed and tends to have a higher return. Yeah, so it's a subdivision within the lending area. Now that one of the things that I wrote in my book that I wrote about investing for beginners, I told people, don't, don't bother investing your portfolio in real estate. And I said, for two reasons. Number one, most of what you would be offered in the stock market is really a real estate investment trust. And if you have a broad based exposure to the stock market, let's just say, through a passive fund, as an example, you already have those real estate investment trusts in the index, yep, because it's listed in the market, so you're doubling your exposure to them. However, the second type of investment in real estate, I would argue, is a separate asset class, and that is your home, yeah, and the land that your home is on, yeah? And that, I would say, that land, as opposed to the rental business, that is generally what a REIT is. Land is a separate asset class. Tell me I'm right or wrong.

Jeff Sarti 29:51
I agree with no, I listen. I agree with you. There's a lot more real estate within stocks. And people realize, realize, when you peek under the hood, um. Land is behaves differently. Really is its own animal, as compared to cash flowing real estate. But a couple, a couple of, like, a couple of points to emphasize, we've definitely done Reed investing in the past. The challenge with REITs, though, is it goes back to the correlation. It is not completely, but there are times where it will move more like stocks as opposed to private real estate. And so all that means is sometimes there's opportunities in REITs versus private real estate. But let me go back to maybe one more example now, which has been a core position of ours, going back to 2009 or 10, going back to the lending side. So we talk, you're mainly talking now about equities, ownership of real estate. What about lending on real estate? There's a whole asset class of lending on real estate, again, tends to be smaller niche, so a more inefficient part of the market. Just because it's smaller, the big boys aren't playing there. But the smaller is good because there's less competition, and you could charge higher rates, where typically you can make loans on re Are you familiar with, like, the bridge lending space, like short term loans? Yeah, definitely.

Andrew Stotz 31:07
But I think my audience may not necessarily know all of that, so maybe just explain that briefly. Yeah, one that have been in that business? So, yes,

Jeff Sarti 31:16
I'll give a brief overview. It's been really a wonderful and resilient and consistent asset class for us going back, you know, call it 15 years or so, where a typical story is it might be, let's say a real estate developer who's looking to buy an apartment building. Let's say it's a ten million building, you know, small, four Plex, eight Plex, whatever it is. And they're, they're looking to close quickly on that, so they go to their bank, and they've tried to get a loan, and the loan, the bank says, sure, but it'll take three months. And the guy says, I don't have three months. I want to close on this quickly. So they go to what's called a bridge lender who can close on that loan very quickly, in a week or two. And the bridge lender, the groups that we invest with, they just make a short term loan. So typically, the most common term is 12 months. So that's great as a starting point, because we talk about interest. Rate risk. The biggest risk with interest rates is duration on bonds. These are very short term bonds. That's as a starting point. And the

Andrew Stotz 32:10
bridge lender has access to the collateral if they can't get the full lending or how does that you

Jeff Sarti 32:16
they are? You should think of the bridge lender as the bank. They own the keys, just like the lender does on your home. They are in first position. There is no one ahead of that lender. So that's key, right? You own the collateral. Again, goes down at an example I gave with corporations of the trucking fleet or inventory. If something goes wrong with the real estate or that real estate professional, they can't pay on the loan, you own the keys to that real estate. Now the last key component is, all right, how big of a loan on a loan to value? And the standard in terms of the funds the world that we lend on is basically 60% loan to value. So what that means is, on that 10 million property, they're not lending, let's say 80% maybe, like a bank would lend, they're lending 60% or $6 million so even in a challenging real estate environment, and by the way, we're in one right now, real estate has been challenged in the US with rising interest rates, but you have a 40% cushion in terms of declining interest rate values. And by the way, that happens has to happen within a quick 12 month period for your principal to be threatened. And so it's a place where you're a short duration loan, relatively high interest rate, and backed by collateral, you could be diversified geographically. We are across the country, literally in the funds across 1000s of loans. So it's been a really consistent, resilient asset class for us, where, for example, just it kind of marches to the beat of its own drummer. When things are going well. This does well, but then 2022 great example, when bonds got crushed, you wouldn't even if you looked at the return stream of these things, you wouldn't even noticed. It would have looked like it was marching to the beat of its own drummer. It made just like what it made the year before the year after, because there's no real interest rate sensitivity, because the short the nature of the loans are so short term,

Andrew Stotz 34:08
and if the value of the property went down by 40% you still get your money back.

Jeff Sarti 34:15
Listen, yeah, that's and, and you would still get your money back. Listen, that's where, theoretically, it gets that where it gets a little messy, you might have to foreclose on the property. You might then have to go sell it. There's cost. So listen, there's no issues with situations. You don't want to be in that situation. But that is, listen, it's we've been lucky. Don't get me wrong, we've had tremendous tailwinds over the last 15 years. Real Estate's pretty much gone up outside the last couple years. So we've had very few circumstances where that's happened in recent years that's picked up a little bit where, you know, maybe there's been a foreclosure and you'd have to work something out. But yes, generally speaking, even in really, really bad scenarios, you're principally protected. Um. Um, and because, you know that 40% cushion is very big.

Andrew Stotz 35:02
So now we've kind of built some subdivision within real estate investing. We talked about REITs, we talked about, you know, your own, let's say, your own land and house, which, for many people who aren't rich, that could be a huge allocation of their overall wealth, and therefore they have good exposure to that. And then lending on commercial real estate, the bridge lender type of thing is a subdivision within the real estate asset class. So we've kind of said, Okay, there's stocks, there's equity, there's lending and there's real estate. Certain parts of real estate really behave as a separate asset class. Are there is commodities an asset class

Jeff Sarti 35:43
to you? Yeah, I would say commodities is. Commodities is the one other one that I'd say behaves differently. We dabble in certain commodities that being said, where we've had a meaningful core position, which I quasi call a commodity, and you alluded to this is gold. We've been investing in gold, really, since 2015 for quite some time. And while it has, gold has some features of a commodity. One of the reasons we tend to not have overweights in other commodities, it goes down to the correlation argument. Most commodities are dependent on the economy. Think about copper. You think about other commodities, oil, etc, in growing economies, those will do well in recessions. What happens to commodities? They get crushed. So actually, there's a decent amount of correlation, ultimately, from a long term point of view, to stocks both depend on a growing economy gold, and that's a whole separate discussion that we could potentially dive into. But gold truly marches to the beat of its own drummer, where there's plenty of instances, and listen, we're in it right now, where gold really diverges from other commodities. And that's because we really believe there's a different, different use case, different rationale, and why, why someone is

Andrew Stotz 36:56
would you say? Would you say commodities? And commodities is an asset class, and gold is an asset class.

Jeff Sarti 37:01
I view gold to some degree, as a cash alternative, okay, it's, it's an alternative currency. From my point of view, the lion's share of investors, their net worth, is in the dollar. The dollar is, by its very nature, a debased it's something that's going to debase over time, and gold, we view as the other currency that will theoretically keep its value. It's volatile, don't get me wrong, but over the long term, we'll keep its value, purchasing power as a store of value, especially against $1 where we have a printing press, and we all know what happens with the value of the dollar over time. So

Andrew Stotz 37:41
we've talked about asset classes, let's say stocks or let's say investing companies. We talked about, let's we can use the word bonds, but let's say that's lending to government or lending to companies in various ways. And then we talked about commodities as a separate asset class, although at times it's really driven by the economy. So it's correlation is questionable. And then we've talked about gold, and you've kind of classified it, as you said, as a cash alternative that has a unique correlation or movement relative to the economy. Economic situation. Is there any other asset class?

Jeff Sarti 38:22
My knee jerk reaction is no, I guess I would expand on then, why, how we can create what we going back to the true diversification argument when you think about various examples. And I actually just listened to the podcast you just released with Larry swedro, where he talked about things like reinsurance, things these are various forms of lending, healthcare royalties. We do a lot of healthcare royalty investing. In essence, all you're doing is you're buying, you're lending, you're lending to a biotech company, and in exchange for that working capital, you buy a share of a royalty stream of some sort of pharmaceutical drug or medical device that's just lending too. But again, when we think about risk factors, that's when I think about asset classes, really, what I'm saying is, what are the risk factors that will drive the performance of that underlying investment? And so that's an example of a healthcare royalty, a drug that's fighting some, let's say, an immunology drug that's fighting cancer. That's a loan totally different, completely different than the loan I made to a company that's where the collateral is its trucking fleet. I mean, that's like as night. It's apples and oranges. So I don't make it somewhat simplistic, but those are almost two completely different asset classes. So

Andrew Stotz 39:40
for the people that are listening or viewing that don't fully get what you just said, you could take a portfolio that someone has, let's say, of 100 stocks, yeah. And you could say, okay, they have exposure to various sectors, healthcare, you know, utilities, whatever. And we could say that those. Do is have different exposures. But then what you could also just do is say, what are the risk factors that this portfolio overall is influenced by, and let's say one is inflation, and let's say another one is GDP growth. Let's say, you know, another one is currency, maybe, or the like, and we can list out a series of risk factors, and then we can go back to our portfolio and maybe back test it, and say, what level of exposure do we have to these very risk factors? And you find out, Oh, wait a minute, even though we're diversified across these different asset classes, we're actually really, really overweight or heavily invested in a particular risk factor. Let's say inflation as an example. And then you may say, I don't care about, you know, asset classes. I need assets that will reduce my exposure to any particular risk factor. Is that, is that what you're saying?

Jeff Sarti 40:58
I love how you said that. It really comes down to risk factors. It's really thinking through that's where we spend our time, really poking holes in the various opportunities we're looking at, and thinking through the broader macro risk factors that can break that investment. And to your point, the challenge with so many traditional investments. And of course, we have traditional investments too, but the reason we have so many other pieces of the pie is when you look at those risk factors, the ones we all care about, recession or not, what's going to happen with geopolitical risk, war, etc, inflation, more often than not, those traditional assets have over exposure to those things, As opposed to less exposure to those things.

Andrew Stotz 41:42
Yeah, Okay, last thing, just because of the job that you do and the service that you provide, you talk about long term and I think a lot of people you know understand the importance of setting long term goals, diversifying and all that. So if you're a long term investor, and you wake up one day, and then you see on the news, it says all asset classes have a correlation of one today, right? Um, does it matter? I mean, come on, for 30 years, let's say, prior to today, they didn't have a correlation of one, and within one week, one month, one year, they won't have a correlation of one again. And therefore, I never really got this point of correlation of one, because if, if you say all asset classes have a correlation of one, yeah, oh, my god, uh, now, now we're all correlated one, I got to do something. Yeah, no, actually, it's just a moment in time, yep, where actually one of the best things to do in this type of moment in time is nothing. So I'm just curious, like, what, what? How are we supposed to think about when people say there's a correlation of one?

Jeff Sarti 43:07
Listen, I agree with you. And like, just to give advice to more the traditional investor who is even more in a 6040, portfolio, you should not be panicking and selling at the wrong time. And when correlations do go to one, you got to take your hit and then ride through it, because things will come back. I'm not saying things will go down forever, that being said all moments in time should not be weighted equally again. It comes down to managing risk, which I know you have your like, six tenants, and for us, that's one of our core tenants. It's risk management, and risk management really only matters in those rare times, and I acknowledge this is only five or 10% of the time, but that's where wealth is really destroyed, and bear markets can be nasty, and they happen more often than people realize. Again, we've been spoiled, and snapback has happened so quickly, like the COVID went down 36% it came back, you know, within months, not even years. Really, it's been since, oh, eight. We had a nasty time, and then money printing came and saved the day. That's even a second question, Can money printing save the day the next time? So our concern is that it's about permanent loss of capital. And when I mean permanent, yes, I mean more long term than a moment in time. The 70s were we've had periods of time, right? The 70s were an example. The 30s were an example. Let me. Let me actually, let me make one more point. There's definitely we view stocks because we, of course, have stocks, we just have less, less exposure to stocks than most. But we, to your point, stocks have to be viewed as a long term investment. Without a doubt, we would say longer term than what most people think, more than 10 years, even 15 or 20 years. Because if you look back at, let's say, the last 100 years. So I think you could, you could really break it down into 330 year segments. And in each of those 30 year segments, what you have is about 10 of those 30 years where stocks are flat, losing to inflation, really bad returns. That's from 1929 to 1943 flat, and then the next 20th years, returns were wonderful. Then 1966 to 1974 flat actually took until 1982 to break even with inflation. Talk about long term. That's a that long time to be invested in stocks and weight. Then the lost decade of the 2000s this every people should expect 10 out of every 30 years you're going to have a long, long wait. Now that doesn't mean you don't own stocks. It just means, I strongly believe that should represent, then, an appropriate part of your portfolio. With that description of volatility, I don't think that should represent 60 or 70% of a portfolio. And by the way, valuations matter if, if stocks were trading in the high single digit or low double digit PE ratio, I would be singing a different tune. But that is not the case by almost any objective measure. Mean we're trading maybe not quite at 1999 levels, but near all time highs in terms of PE ratios, etc. That's not a place where you should be backing up the truck and investing a lot, a lot in stocks. One last point, this isn't just me saying this. I mean, you look at all market predictors, it came out a lot last year. I think it was Goldman Sachs predicting their next 10 years of stock returns 3% less than inflation. Morgan Stanley, their CIO came out, and basically he said stocks are gonna be about flattish for the next 10 years. It all comes down to valuation. Again. That doesn't mean you have no stocks, but that's not something I would really lean into and say, Okay, that should be 5060, 70% of my portfolio.

Andrew Stotz 46:49
So is what you're saying is that the 60, let's just imagine that the typical 6040 is suitable for someone at that stage of their life. But what you're telling them is that, well, wait a minute, there's times that that 60 should be 80, and there's times that 60 should be 40.

Jeff Sarti 47:09
Yes, my range would still be a little lower than that, because I think maybe 60 on the upside and much less on the downside. Our typical client right now, because, partly because, driven by valuations. Might have 20 or 25% in stocks, but that's also because we feel like you can have your cake and eat it too in these other areas of the market, and again, they're private, that you're the trade off is some illiquidity you can make stock like returns, knock on wood, at much, much reduced risk, again, where you're the lender, as opposed to the equity owner. So why not? Why not do that? Okay,

Andrew Stotz 47:42
now I got one last thing. I promise this is it before I've enjoyed this. Thank you. I've enjoyed this. Yeah, okay, so for the most, most, most people that would be listening, they're like, Okay, great, Jeff and Andrew, thanks for your fun conversation. But how the hell do I invest in all of this private credit and all that? And this is where I talk a lot with Larry swedroe about, you know, what are the instruments and how can we do it? Or is that can really only be done by a large, you know, or, let's say, mid to large size asset management company, or asset wealth management company that can get access to it, you know, are there ETFs? Are there funds? Or what is it? What does an individual investor do? So

Jeff Sarti 48:24
listen that there's no shortcut you talk about, you talk about doing your research like point number one on your list. We actually have a saying, investing starts with investing in yourself, like we you got to do the work. You got to do the work. Now, I know this will sound self serving, but you should maybe partner up with a financial advisor who has this expertise. But if not, you know, there's research out there and you could do the work. The nice thing is, there has been really a proliferation in the last decade of more instruments that can you can have access to some of these private markets in more user friendly formats. All I can say, and plenty of them, are wonderful, don't get me wrong, but you got to be very, very careful, because the challenge with a lot of these, there's a few challenges, but the main one is a lot of them promise liquidity that really is not appropriate for the underlying illiquidity of the asset class you're investing in. So there's a lot of quarterly liquid investments out there, and many of them are wonderful, and we invest in some of them. But if you're investing in a quarterly liquid instrument where you're buying real estate that really should be a 10 year old and who prices, how do you price real estate? Is it? How do people get in and out of something with that type of opaque pricing, that's a recipe for real issues. We even saw a glimpse of that with the Blackstone REIT, where there was a run, run on run on the bank, if you will. With regards to that, especially in a tough environment, we could see real runs on these funds and illiquidity. Yeah, that could be really problematic. So there's a lot of nuance with this stuff. That being said, there's a lot more, lot more availability now than there used to be. And

Andrew Stotz 50:08
Larry, in the back of his book, talks about some he gives some ETFs or some instruments, let's say that people could consider when constructing their portfolios and under reinsurance, he talks about pioneer and Stone Ridge, Oh sure, yeah, alternative lending, he talks about Cliff water and yeah. One of the things about these, though, is that they're almost all funds, yes. And funds are, you know, probably more suited for this, because you can kind of lock in a little bit more, as opposed to an ETF that's really based upon the inflows and outflows to some, to a large extent, but yeah, are there any ETFs that a person, let's say, seeing in Thailand, that could invest in private credit or something like that, you know, um,

Jeff Sarti 50:50
my short answer is, I don't know, because I think, again, I think there's been some, but this should not be in a daily liquid product. Yeah. So the nature of those firms you mentioned, I'm fans of all of them, is they tend to have appropriate illiquidity. They tend to be quarterly liquid instruments. And again, I'm not sure, depending on the jurisdiction, if the average retail investor can access those, or if you have to go through a wealth manager that I'm not sure, Larry would probably know better than me. But there, there are new ETFs that are popping up that I've seen. My intuition with some of these, again, is I would stay away, because, again, you're investing in illegal, quick, in illiquid assets, in daily liquid structures, and there's just an inappropriate mismatch that

Andrew Stotz 51:38
that really helps explain it. So I appreciate that. Wow, what a discussion with a lot of things that we covered. I really appreciate the time on that. Normally, I don't spend that much time, but I figured we had a good opportunity to do that. So I appreciate that. No, I really enjoyed it. Yeah. 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. Okay?

Jeff Sarti 52:01
Yeah, that it was early in my career. Probably, like a lot of your guests that I've heard, you know, a lot of the mistakes we make as as young entrance into the industry. I entered the industry in the late 90s, in the.com boom, and so it was 1999 where I, again, it wasn't a lot of money. In the grand scheme of things, I was just starting to make a little bit of money. But what did I do? I bought the.com companies, and I thought I was being safe, because I bought the name brands, right, the Yahoos and EMC and Sun Microsystems. I stayed away from the pets.com so I thought I was being smart and safe. But then we all know what happened, right? All of these dropped 90 plus percent and then some. And that was just a tremendous, tremendous learning experience on so many facets. One is, again, something I know you talk about, you harp on so much, failing to do your research. I should have known better. I was actually just getting my CFA. I was an analyst. I knew these stocks didn't make sense, but I still lean into them. And why it comes down, it's emotions, right? I leaned I embrace my emotions instead of pushing back against them. So it was fear and it was greed, it was FOMO, and it was also, to some degree, even a lack of imagination, where I was like, Oh, sure, these can get hit, but maybe they'll be down 20 or 30 or 40% I had no concept that these things can be down 90 95% and I think I have concerns around the current environment where, I mean, we've even seen it since then, right? Great companies, by the way, companies like zoom and peloton, you name it, have dropped whatever it is, 80 plus 90% when stocks get untold, untethered from fundamentals, and even some of these, the Met The Magnificent Seven stocks, in many ways, some of them have. People are like, oh the so bad if they drop 20 or 30% I think that's a lack of imagination. Of course, they can drop more than that. That doesn't mean they're not amazing companies. They are amazing companies. But, like, Cisco's a great example. What's the largest company in the world in 1999 I just looked it up the other day, so it dropped like 90% its revenue now is triple what it was in 1999 I didn't realize that the company is three times the size. But whereas it's a $200 billion market cap, now it's 1/5 basically 1/4 or 1/5 the size in terms of its stock price, 25 years later, even though it's triple the size. So now it goes back to long term, right? Talk about long term. You wait 25 years, it ain't coming back. So that was, that was a big learning lesson, and obviously shaped a lot of how I think about diversification and correlation and being in things outside of traditional socks. It's interesting

Andrew Stotz 54:45
because for the younger listeners, they didn't know a guy named John Chambers who was running Cisco, and right, you know, he was pumping the story, but he was delivering, you know, and it was, it was the internet boom, and he was into the hardware aspect of it. And so. It was, I was a lot to get excited about.

Jeff Sarti 55:02
There was, he was running an incredible company, but again, at certain point price matters. Yeah, it doesn't matter how amazing that company was, got dislodged from fundamentals. Yeah.

Andrew Stotz 55:12
And I think when, what I would, what I took away from that is something that you said, you said, when, when the prices get untethered from the earnings Yeah. And I think, I think what you actually meant to say was, when they get untenured from earnings growth, in the sense that our expectation of the future is what matters. You know, it's great that, you know Microsoft as an example. Yeah, Amazon, Nvidia, they have grown their earnings massively. And so the PE in relation to current earnings, yeah, you know, you can say it's not like the.com bubble in the sense that there are underlying earnings, but it really is about the earnings expectation, earnings growth expectations, where the untethering really is possibly happening, and those companies will not be able to deliver the growth in the earnings. They may be able to deliver the same level, let's just say, same level of earnings, but without the growth, people will say, Well, I'm going to go somewhere else and get that earnings growth, because that is a major driver of the share price that I don't even need this company to expand its multiple if it can deliver 20% earnings growth, my share price is going to go up by 20% Did you mean perspective earnings

Jeff Sarti 56:32
growth? Without a doubt, people are think rearview mirror and imagine what happened in the last five years will happen in the next five and again, it goes back to Cisco. Great example, Cisco actually delivered. Of course, they had a tough time in oh one and oh two, and their business contracted, but they came roaring back. So they even grew their earnings, and still it's trading at a fraction of what it did 25 years ago. Definitely,

Andrew Stotz 56:57
if you ever decide to write a book on the history of the markets. I think you should write one on Cisco, because what a great story. You know, ride, yeah, and then surviving, and then, as you've just taught us, you know about the idea of, even though they've survived and actually done well, that doesn't mean your share price does well, okay, so based on what you learn from this story and what you continue to learn, let's imagine a young person that gets excited the way you and I did when we first started investing. What's one action you'd recommend our listeners take to avoid suffering the same fate? Oh,

Jeff Sarti 57:31
man, that's a great question. I'm hesitant to recommend anything, because the truth is, the way I learned is I made the mistake. I mean, I did it, and I had money at risk, the

Andrew Stotz 57:43
Nike recommendation,

Jeff Sarti 57:44
right? Yeah, right. Just do it. There is an element, though, like, I do have, like, you know, people and analysts, young people in my company, who are, like, playing in stocks, and I have an options background, so they asked me, and they like making trades and the record, and I give them advice. But a certain point I don't want to give too much advice, because the only way you can really learn is by doing. Learn is by doing it and making mistakes. That being said, it goes back to something we hit on before it's doing the research. You got to do the research. I went afoul of the research that I knew, and the fundamentals and all the stuff I learned in my CFA and Graham and Dodd and all of the fundamentals of investing, and I just ignored it. And so don't take shortcuts, or if you do, at least understand what you're doing, you're gambling, you're speculating. That's different than investment. And okay, that's okay, as long as you know honestly, for being honest with yourself what you're doing, you're speculating and not investing. And there's a time and place for that, and there's $1 allocation for that, so keep that speculative piece of your portfolio small.

Andrew Stotz 58:53
Good advice, if you're going to go to Las Vegas, just do it one week, kind of 52 not 52 weeks, a lot of that. Okay, so what's a research resource, either of yours, or any other you'd recommend for our listeners?

Jeff Sarti 59:08
Yeah, listen, that's a couple things. One is, we do. We really are passionate about financial education, so we put out a lot of content. So our website, Morton wealth.com, ton of we have a weekly podcast. I write quarterly newsletters, lot lots, lots of stuff. But then beyond that, listen lots of listening to podcasts. I'm excited. I connected with you in recent weeks. I've really, I've really listened to some of your stuff. Really enjoyed it. I think there's a lot of synergies. Again, you talk about the six investment mistakes that I are so consistent with some of ours. The last thing I'll think about, I guess, a couple of books that really made a real difference for me, Thinking Fast and Slow, by Daniel Kahneman just really talking about, it's really humbling how much our emotions, again, drive investment decisions. So being able to really compartmental. And really understand those emotions and know those pitfalls. Huge fan of that book. And then I know you've had like Morgan Housel on, I believe, a long time ago, some of his work is great as well.

Andrew Stotz 1:00:10
Yeah, yeah, fantastic. Great resources. And last question, what is your number one goal for the next 12 months?

Jeff Sarti 1:00:18
That's a good question. Honestly, what I'm super excited about is continuing to find some of these uncorrelated opportunities. We're it's all we do. We've been doing it for a long time, but we're continuing to find more opportunities. And I think interesting thing happened a couple years ago with regional banks, like with that whole fiasco, traditional lenders have really left, and they really only focus on cash flow lending. So more interesting, safer stuff is falling in our laps, and otherwise we wouldn't have seen before, again in non correlated areas. So long story short, my investment team and I, we've been traveling the country, uncovering some new niche opportunities, and I'm excited for more that we're going to find great

Andrew Stotz 1:01:04
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. As we conclude, Jeff, I want to thank you again for joining our mission. And on behalf of AE 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?

Jeff Sarti 1:01:25
Listen? All I could say is I really enjoyed the conversation. It was a lot of

Andrew Stotz 1:01:28
fun. Yeah, appreciate it. Well, 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, Andrews dot sing. I'll see you on the upside. You.

Andrew Stotz 00:02
Andrew, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story in episode 645, now Larry stands out because he bridges both the academic research world and practical investing. And today we're diving into a chapter from his recent book, enrich your future the keys to successful investing. Specifically, we are talking about chapter 33 and investors worst enemy, Larry. Take it away. Yeah.

Larry Swedroe 00:35
Thank you, Andrew, good to be back as almost always. Each of my chapters begins with a story to help people understand the difficult concept. And this story begins with my background. As a kid, growing up in New York City, and like most kids who were athletically inclined, I practically had a basketball glued to my hand. I went to school in the morning, ran home, had a glass of milk and some cookies, and then ran back to the afternoon center to play basketball from like 330 to five o'clock. Run home, have dinner, and then run back to play at seven o'clock till 10 at night there. And I was a good enough athlete that I was able to actually make my colleges freshman basketball team, although I spent most of the season collecting splinters on the bench, and it was only a d3 school, so I wasn't saying much at age 25 I moved out to California, where everybody pretty much played tennis. In those days, that was a much more popular sport even than it is today. And because I was a good athlete, I fairly quickly became a competent player. What people would say would be a good weekend player in US rankings, it would be like a three, five player. So I could play with most people and be competitive, but I would often play against people. At the time, I was 35 and a good athlete could run around and stuff, and I was getting beat by 6065 year old men who I was much better athlete then. But of course, they were better tennis players. And this, of course, became very frustrating. And finally, I decided that maybe I ought to learn how to play the game of tennis and what the right strategy was. And I was out on the court with a tennis pro on a vacation, and we were doing drills. And of course, my weaker shot, like for most people, was my backhand, especially in those days, if you use a one hand backhand. And the Pro, and we were rallying, and he hit a ball deep to my backhand, and I cranked up and hit her, and he came to the net, and I hit this beautiful passing shot like, look like Roger Federer, I do, and went right past them, right down the line, landed dead in the corner. And I'm feeling great, and I've got a big smile on my face. And he calls me up to the net and said, Larry, I want you to know that shot is your worst enemy. So what are you talking I just made this great shot. Said, the problem is you're going to remember that you made the shot and try to replicate it. And while I could make it, he said, nine out of 10 times, you'll make it one out of 10 times, and you play what is called, at your level, a loser's game of tennis. What that means is most of the points are lost by somebody hitting a ball wide into the net or long they're not one because you hit a great shot. Obviously, the higher the level you go, the reverse is true. The great tennis player, if you watch a match with Roger Federer against Nadal, if you were lucky enough to see those events, the points were one because somebody just hit a great shot and the other person couldn't quite reach it. There aren't that many errors at that level. So he said the key to winning the losers game of tennis, which is what anybody but say a pro level at a club, you know, would be, is to just get the ball back with a decent amount of pace so someone can't just wind up and hit it deep. Okay, keep the person back and stop trying to hit winning shots. Just try to avoid hit losing shots by hitting some great shot. And I said, Boy, that sounds like good advice. Maybe I could do better against these people who are better tennis players, but I'm clearly the better athlete, and all of a sudden, I was beating people fairly easily who were beating me. So the key to understanding any game is what's the right strategy, and so how does this all relate to investing most? People think the key to investing is identifying the stocks that are going to outperform the market and avoid the ones that are going to underperform. Yet the vast body of evidence says that's playing the losers game. You're much more likely to hit the ball long wider into the net than find the next Google, and the evidence is overwhelming that the vast majority of professionals who have advanced degrees in finance and mathematics have access to the best databases, etc, spend 100% of their time doing this stuff, have huge advantages over individuals. Yet, as we discussed, something on the order of 98% of them failed to outperform in any statistically significant way on a risk adjusted basis, even before taxes. So the right strategy is to avoid the losers game. Don't try to pick individual stocks or time the market, just invest in a disciplined way so you can stay the cost through bear markets, and you will win simply by getting the markets returned. And so that's the winners game. The problem is we are all human beings, and as people who have observed the world of investing, investors are all just like I was on the tennis court, overconfident that I could make that great backhand passing shot. They all think that they could pick the next great stock. 90% of the people of the ass think they can outperform the market when we know that maybe 2% of them do. So the key is to avoid human biases such as overconfidence. Understand what the right strategy is, and it's because the markets are so highly efficient, not perfectly. So markets make mistakes, but it's hard to identify, especially after the cost and I would add the time and effort required to succeed, right and aren't you better off spending that time with your spouse or your children or grandchildren, taking a nice walk around the park or in the beach, reading a book or playing a game With your grandkids, then trying to outperform by picking the next school book. I leave that to your readers. I think that's a rhetorical question.

Andrew Stotz 07:27
Well, I think that also you could say, if you're a young person and your objective is to accumulate wealth, figure out how to add more value at your job. Figure out, you know, you know how to start a business that adds more value. These are great ways to build wealth, you know, over time. I just want to go back to something you've hit on many, many times, and I know we've even talked about it in relation to playing a tennis player versus playing the market, you know, just to help people understand, you know, what's the difference? So, for instance, I can play that great tennis coach that you just talked about, and he could even have a bad day, and I could even win it. Could. I could be a winner, you know, he could have a bad month and all that. But, you know, what I'm playing is one man or one woman, in this case, depending. And what I'm thinking about is, you know, can you just talk about, who are we playing when we're playing with the market? Okay, we had a fun, fun, you know, game match of tennis, and we played this one person. We're playing pickleball, we're playing this one person. But what happens when we're playing the market? Who are we trading with? Yeah.

Larry Swedroe 08:31
So actually, the way to think about it, I believe, is this, the research shows very clearly, and I think it's pretty simple to understand when you play games where you're playing one on one competition, it actually only takes small differences in skill to lead to huge differences as an outcome. As much as you might like to think you could play a tennis pro and maybe even win a game or a match, that's never going to happen. Literally never, right? Okay, because small differences in skill. Roger Federer, for example, one maybe the greatest player of all time, never lost the single first round match in a Grand Slam tournament. Yet he was always playing against one of the best 128 players in the world, always, and he never lost, ever. All right, so one on one, you could play against a very a master chess player, and if that master chess player plays against a grand master, they'll never win. Maybe they'll win one or two out of 100 matches, the odds are tremendously in favor, even with a small skill advantage. However, when you're competing in the market, you're not competing against one on one, you're competing against the collective wisdom of the entire market. Including their PhDs and rocket scientists at Renaissance technology and Citadel and Warren Buffett, and the research shows it's much harder to win that kind of game because of what's called the collective wisdom of the crowd, and that's why it's such a difficult game to win.

Andrew Stotz 10:22
You said small skill advantages can have major differences in outcomes in one

Larry Swedroe 10:27
on one? Yep, all right, so let me use this example hitting a baseball. Maybe the greatest hitter of all time was Babe Ruth or Ted Williams or whatever. Okay that they, however, were playing a game of one on one. Imagine now that they were facing a pitcher who had Sandy Colfax his curveball, Randy Johnson's fastball, call Hubble's screwball. Greg Maddox is control, etc. The best of each one of them, they probably would hit 200 not 350 or whatever their career averages were, and that's what you're competing against when you're playing the game against the market. But investors never think about it that way. You call

Andrew Stotz 11:24
it the collective wisdom of the market. I guess when I was thinking about what you just said on the baseball pitcher, I was thinking the collective skill of the market.

Larry Swedroe 11:32
Yeah, that's right, it is the collective skill in the same way that Roger Federer, as great as he was, as if he was playing a person who had John McEnroe's volleying skills, you know, Andrew Radox, serve, etc, picked the best the best forehand, the best backhand. He would never have won. He couldn't beat him ever, right? And that's the same thing that is true when you're trying to beat the skill of a market, it is a much, much more difficult competitor.

Andrew Stotz 12:10
Is there any other parallel? I mean, clearly this. The parallels that you talked about tennis really help us to, you know, differentiate. Is there any other game that we play in life, that we're playing a collective experience or a collective skill in the market?

Larry Swedroe 12:27
Well, any one on one game shows you that small differences in skill lead to big differences in outcome. The only one that I can think of, generally is the stock market where you're competing there. However, there are all kinds of other markets, foreign currency markets, betting markets. Now, right? We've got betting markets on almost anything like, will the US launch a strike against Iran in the next 90 days? You can bet on that, and very few people have the skill to outperform the market, especially after the trading costs, because the brokers in that trade, or the house Las Vegas, is taking what's called the vigorous maybe 5% so you have to win like 53% of the time, not 51% of the time. The

Andrew Stotz 13:24
vigor ish, I love that word. You've talked about that before,

Larry Swedroe 13:28
good Yiddish word that became an English word.

Andrew Stotz 13:31
Yeah, that's a good one. In the last section on page 210 you talk about the amount of money that the capital market is extracting. You talked about 150 billion. Maybe we can close with that discussion. Yeah.

Larry Swedroe 13:45
So Ken French did a paper on this and show that the average active fund underperforms by a certain amount every year after expenses, not taxes, even. And he then multiplied that number by the amount of money in actively managed mutual funds to come up with that figure. So the average investor in mutual funds that are actively managed is losing that amount of money. Just think about what the average person could do if they had that extra cash. And you know, it would be like a matching grant to their IRA every if they stopped just trying to beat the market and accepting market like returns. Yeah.

Andrew Stotz 14:28
I mean, that was a good chapter to help, help everybody to think about, who are we competing, about against, and how are we trying to compete the

Larry Swedroe 14:38
way I try to end these conversations and giving advice to people is so I ask them. So I'll just ask you, Andrew, you know, think of a stock that you want to buy. You give me the name. I ask you all the reasons why you want to buy it. You've done your research, or at least you think you've done research. Search. And you give me all these reasons, and then I agree with you that, let's assume you're 100% correct. Everything you say is true. And then I ask you, do you think that Warren Buffett, they're rocket scientists and Renaissance technology and Citadel they're unaware. And you know, you think the stock is at 30, but should be 40. If they thought it was worth 31 it would be there, because they've got billions of dollars that they can move the prices and move it there. It's obviously at 30, because they don't think it's worth 31 let alone 40. So what you have to think of is this, 90% of the trading today is done by the big institutions. That means, if you're buying a stock, you have to ask, who's the sucker I'm buying it from, who's selling it to me, 90% of the odds are it's Warren Buffett or Citadel or some other and then you have to ask, who's the sucker at this poker table? Is it me, if you're honest, the odds are highly likely it is, unless you have inside information, and Martha Stewart found out, what happens if you trade on that and get caught?

Andrew Stotz 16:15
Yeah, that could be your worst investment ever if you trade on that inside information. Yeah, I think the good question is, is it? It's not even a question, it's a statement. It's already in the price.

Larry Swedroe 16:27
That's that's real. What you should always assume is that everything you know is either in the price or illegal to trade on.

Andrew Stotz 16:39
And on that note, I want to thank you for another great discussion, and I'm looking forward to the next chapter, chapter 34 where we're going to talk about bear markets, unnecessary evil. And for listeners out there who want to keep up with what Larry's doing, find him on X Twitter, at Larry swedro, and also on LinkedIn. This is your worst podcast host, Andrew Stotz saying, I'll see you on the upside. I.

Andrew Stotz 00:02
Hello fellow risk takers, and welcome to my worst investment ever. Stories of loss. To keep you winning in our community, we know that to win in investing, you must take risk, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, and I want to thank all my guests from Norway for joining the mission, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, and I'm here with featured guests. Austin Cala Cleve, Austin, are you ready to join the mission?

Oeystein Kalleklev 00:38
Yeah. Thanks for inviting Andrew. Yeah, in fact,

Andrew Stotz 00:41
I was just looking at our email communication. It's been a long time trying to get you on this show. So

Oeystein Kalleklev 00:48
I appreciate been a bit a bit busy lately. But no, I'm free, so now I could take the opportunity. Yeah, yeah. My, my some good deals and some bad deals. Maybe I

Andrew Stotz 00:58
think that we're going to have some fun going through it. So let me just briefly introduce you to the audience. Austin's the outgoing CEO of a company called Flex, LNG and advanced gas. He's got prior experience as CFO of other companies, and he's been involved in this industry, let's say, for many, many years. So Austin, why don't you take a minute and tell us what is the unique value that you have been bringing to this wonderful world?

Oeystein Kalleklev 01:30
Yeah, thank you. No pressure on that one. I've been doing shipping and energy, I would say now for 20 years, worked for three different self made entrepreneurs, three families, basically. First one, we answered that move. We took over the Christian shipping company when it failed in the 1980s so I was CFO for him, and I'm still on that board, which is a kind of industrial investment company. And then I joined another family, the segment family who know today is the sponsor of the Knudsen company, where I was CFO, and also chairman of the MLP general partner. Of them will be crude offshore partner, listed in New York. And then the last seven and a half years, I've been running two shipping companies, flex LNG, which we listed in us in 2019 and then advanced gas, which I've been running now the last three years, on the side, where we today actually declared our last dividend. So we kind of winding up that business, and that also felt a good time for me to step out and do something new.

Andrew Stotz 02:39
And what, what has changed in the industry, you know, from when you first started to where things are now. I'm curious, like, is it the size of vessels, or is it the type of gas, or is it the ports, or, I mean, what? What are some of the things that you've seen, the changes that have been happening,

Oeystein Kalleklev 02:58
if we look at shipping. Then, firstly, of course, I've been involved in a lot of other industries, like oil services, restaurants, mining, bio, ethanol and another retail and real estate. But if you look at shipping, I think that the biggest drivers the last couple of years been, of course, the shale revolution in us, which certainly made us a big exporter of hydrocarbons, rather than being the biggest importer. And then the flip side has been China becoming the biggest importer. So that has changed the dynamics of the shipping world for most segments, being, you know, the container trade. It started with the container trade, with China entry into vtuo, and then us becoming exporter, biggest exporter of LPG, by far, biggest exporter of LNG. And they are going in both segments, and then also oil, where we also see us exporting crude oil. So so that's a big change, I think also after the great financial crisis, 2008 to 11, it was in Europe with the peaks crisis, we have also seen banks becoming more reluctant to lend to the sector, European banks, especially than German banks, which are more or less when bankrupt, they've been stepping out of the sector. The Chinese been entering. But meaning that, you know, the banks are more reluctant to lend, which means that you need to have bigger clients. So the companies are getting bigger. There are more regulatory costs of complying with all these new rules coming out of both EU and the IMO, which means that you need scale. Capital Markets also like scale. You know, they don't want to be investor in companies with two $300 million market cap. They want to have 1 billion, 2 billion, $3 billion market cap in order to make it interesting. So these, these are, you know, the biggest drivers, I would say, in the shipping world. This together, of course, with technology. But technology is always changing, and

Andrew Stotz 04:55
what would you say is the future. I mean, like, for instance, we saw with the. Russian invasion of Ukraine as an example, shifted all of that oil and gas coming out of Russia going directly into Europe. As an example, we see China trying so hard to try to transition onto nuclear energy, and you know any other, you know, renewable types of energy, we see deals, for instance, happening in currencies outside of the US dollar between Iran and China as an example. You know, I'm originally American, but I've lived out of America longer than I lived in America. So I'm kind of watching from around, you know, from far away. But I'm just curious, is there any trends or thoughts that you have about what's the future in this space?

Oeystein Kalleklev 05:47
A couple of items you mentioned Chinese walking outside of the dollar. And we do see this, China has really reduced the holdings of Treasury or government bonds, which is one of the reasons why I think the Chinese banks have been quite aggressive in also lending to the shipping sector and other sectors like the Belt and Road and all that stuff, because they don't really want to have the kind of assets tied up in US government bonds and being pressured by the US government. So they rather want to recycle money into development banks and commercial banks where they can lend so they can have mortgage in a ship, which is much harder for the US government to kind of confiscate it, like we've seen with Russia. Now, after the invasion of Ukraine, they really kind of lost a lot of money because the Western government have freed those funds like they've done within Iran and Venezuela back in the past. And it's also one of the drivers Why gold passed three and a half $1,000 per toy owns recently. You know, I remember when gold went above $1,000 we were big. The family I worked for. We were biggest investor in a gold mine in Guinea. And, you know, $1,000 was all you know. Upon, you know, unbelievable how high price, and now it's three and a half $1,000 so, so, so that's one drive where we see China wanted to invest more in diet assets. In terms of the Russia, they have been managing to turn out battles much better than we thought. We thought with the sanctions, they would have to decline the production. They haven't really but this changed the trade pattern of where the oil is flowing. And typically what you've seen is oil flowing from Russia to India, Brazil, China, and then actually being refined and turning back into Europe. So it's been very good for those people with a product tanker. And actually, tanker market is quite good there these days.

Andrew Stotz 07:41
And one of the things that you can if you look at the map, and you look at the Straits of Malacca as an example, near Singapore, you know, at the edge of Singapore and Malaysia, it's such a pinch point for travel of natural gas, of oil and all of that thing. And some people would make the argument that the US has the power to shut that down, and if they could, then that could put a crimp on the access to the markets of China. Of course, on the other side, you could argue that China is trying to diversify and get pipeline gas, and they're trying to get away from, you know, oil and gas. But I'm just curious if you had any thoughts about, like, the movement of, you know, gas and oil throughout the world. And you know what, what your thoughts are about it?

Oeystein Kalleklev 08:30
Yeah, of course, China is very strategic when thinking about energy security, and that's one of the reasons why they're still building COVID despite them saying that they want carbon emissions to peak by 2030 so they're still building coal. They're building nuclear on a massive scale. They are sourcing more gas from Russia, not not only because of security concerns, but really because the Russians are desperate to sell gas to new buyers, because the European buyers are gone. But one item which they are very dependent on is, of course, crude oil, which, of course, they are boosting domestic production of both natural gas and oil, but still, they are by far the biggest importer. And as you said, with the Navy USF, they could block it, and that's why we also see the Chinese building a lot of naval ships, and then today have, in numbers, more naval ships than the US, which is also one of the reasons why Donald Trump wants to reboot US Naval capacity to build more ships, and you have these tariffs and port fees on on them, ships which are not domestically built. Yeah.

Andrew Stotz 09:37
I mean, it's interesting watching all this go on and I appreciate you sharing some of your thoughts on it, having had a lot of experience throughout the years in that space. So but 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

Oeystein Kalleklev 09:58
story. I It's a. A difficult question. I haven't really prepared on it. I've been part of some investments which have been really bad. You know, most of them were back in the great financial crisis, 2008 when everything unraveled. I mentioned the gold mine in Guinea. I think the family I worked for, we had invested about 100 and $50 million to become the biggest shareholder of that mine was called who gold. And, you know, it was an unstable regime. It was a coup. And then this, this army guy to control. He was shot in the head. And eventually there was so many hiccups operationally. So eventually, I think that 100 and $50 million turned out to be like $3 million when we sold our last share. So everything, more or less, was lost. So so this will happen, crisis, um, I've also been involved in bio ethanol in Brazil, where we invested probably, like $300 million into a bio ethanol plant in Brazil, where, also when, certainly during the great financial crisis, we had to restructure the whole company, and I had to go to us, talking to bond holders, getting them to either choose whether to become shareholders or take a very big hit on the bond loans.

Andrew Stotz 11:31
And what did they end up choosing?

Oeystein Kalleklev 11:35
They, of course, choose the money because they got 45 cents on the dollar, which at that time was fantastic, because everybody want cash at that time.

Andrew Stotz 11:44
Okay, so interesting. You have any other stories? Those are pretty powerful. By the way, your camera went off. I don't know what happened there. I think it's okay. If it doesn't, if you can't, that's fine. We just keep going. Yeah.

Oeystein Kalleklev 11:59
Now, of course, I also been involved in, you know, mining seems to be a disaster. So I've also been involved in nickel mine in the Philippines, where we basically lost everything as well. This also around 2008 11 window. I've been involved. We had a, we were gonna build a FPSO, basically a floating production ship for oil. This is like 10 years ago, our budget was $280 million I think we ended up at $500 million for that building project, and also being one half years late. So of course, those projects are everything once you're getting into mining, you know, usually that's this saying that, you know, a mining, a miner is like, it's a hole in the ground and a cheat on top of it. So mining is a difficult business, offshore business, we talked before the show about the drilling rigs. I've been involved in drilling rigs as well. So offshore is it? Because it can be fantastic. You can make fantastic amounts of money, similar to mining, but once it stops, it's you usually get bust.

Andrew Stotz 13:11
And, you know, it's interesting hearing these, you know, huge numbers and all that. And I would suspect that over your lifetime of in work, you created a huge amount of value. So these were, these were some of the big losses, but I'm guessing that for the families and other investors, there was a lot more money that and things that went well.

Oeystein Kalleklev 13:31
Yeah, you know what has focused most on the during the last 20 years has been shipping. So shipping is, of course, seriously cyclical. So if you find one industry which is a clicker with shipping, is one of those where, typically you have this boom and bust cycle. People markets get good. We saw this back in 2004 5678, until, you know the financial crisis. People were building ship left center and right, you know it. And then when the financial crisis came, the bulk market was poor from 2009 to 2019 so we had 10 years with a very poor market. So this is typically us. You've seen this also in LNG after Fukushima, Japan really bought a lot of LNG, and then people started ordering a lot of LNG ships, a bit similar to what has happened today. And then a lot of these projects were for new export capacity was delayed, and you had a really, really terrible market for LNG shipping in 2014 1516, 17. However, the kind of the down cycle there was shorter because you have a high growth of the market. So the kind of the trend growth takes you out of that depression quicker, for driver where you have a lot less growth. So it takes longer time to get out of a situation with over supply and. Typically involves a lot of trapping of all the ships. So today we are a bit in the same picture with LNG ships, where you had this boom after the Russia invasion of Ukraine, where LNG prices went to the moon. People ordered too many ships. New export projects are delayed, and we have probably the worst LNG shipping market ever now, so we started to falling off a cliff last year. It's been continuing this year. It probably will continue next year. And of course, one of the reasons why in Flex LNG, we took out a lot of long term charters ahead of this, because we saw that the order book was swelling too big, and we locked up more or less all our ships on long term charters, and have about 60 years of minimum charter backlog, which takes you through this process where you have too many ships and you where you probably need to scrap some ships.

Andrew Stotz 15:53
Yeah, shipping is such a cyclical I mean, we had some ship we have some shipping companies here in Thailand that I covered as an analyst, and it's just incredible. I think the whole thing about shipping is you gotta, like, be able to survive the whole cycle, because if you get knocked out at the bottom, then you never get the upside. No,

Oeystein Kalleklev 16:11
I'm sorry, in the other shipping company, I've been running advanced gas, we've done a bit different so it's really two way to capture the upside. You can either sell your ships, because once market is good, asset prices increases, it has a lot great value having a ship on in the market making super profit. The other way is to charter the ships out on long term charter and lock in that super profit, which is what we've done in Flex, because it's not really our very liquid second hand market for advanced gas, where we doing LPG freight? It's bit different. It's not really feasible to get those long term charters. So instead of doing that, we sold off all the ships. So altogether, we sold off 23 ships, 20 ships, just last year. We took the money and we paid out everything as dividends. So for 2024 we paid out a billion dollars of dividend, and last three years, we paid out $1.3 billion of dividend, and then we closed the shop. That's it. So you have to be really disciplined when you are in a cyclical industry, when you have to have a view on where is the market going, and how can I adapt to that? You know, it's

Andrew Stotz 17:22
interesting. When you look at a lot of great investors, they end up holding companies that are consumer companies, because they're not as cyclical. And so you end up, like investors, end up in these, I would say, much easier, easier type of companies to invest in. But I'm curious, out of you know, out of these different experiences in over your career, how would you describe the lessons that you've learned?

Oeystein Kalleklev 17:48
I think I touched upon it. You know, you have shipping is really hard to be kind of have a strategy. We do see some companies having a strategy that by five years, we're going to have twice as many ships, or something like that, which doesn't really work. When you have such a dynamic industry, you really have to think about adapting. It's more about adapting and being tactics rather than strategy, where you have to think about, where is the market going? Where do I think the market will be in two years time? Should I lock in some long term, Charlotte, should I sell some of the ships and kind of adapt to the market all the time, as you get every day you get new information. And certainly some people are putting in along a big contract for 20 new ships, and that's going to change maybe some of the market outlook. So you really need to adapt all the time. Of course, you have to always focus on running your ships efficiently. If you're not running your ships efficiently, you're gonna lose out anyway, so that it's but it's like a critical success factor. You have to really be able to run your ships well. And then it's about timing. So shipping is a lot about market timing, I would say. And those people who have made it big, like the biggest shareholder, both frontline flex, LNG avance, John Fredericks, and he's been in the business for 60 years. And one of the reasons why is he still there, and the most successful is his ability to time the market. And of course, you saw the same with Onassis back in the days he was almost bankrupt, and then the Suez Crisis came in 56 and suddenly, within a short window of time, he became the richest guy in the world, because with the Suez Canal closed, freight rates went to the moon, and he had all the ships open.

Andrew Stotz 19:37
It's incredible. So three things that you mentioned, it's hard to set long term strategy, because you've got to adapt to what's happening in the market. And then you also talked about the operational part, about you got to run ships efficiently, or else you're going to miss, you know, the core aspect of what you're doing. And then there's this timing aspect, which makes this industry so much more challenging. And. Anything else you would add that those three things, I think are pretty, pretty much sum it up.

Oeystein Kalleklev 20:03
I think you have to be knowledgeable about technology, because technology is changing quite often in shipping, even though it seems like a very conservative industry. You know, you have new ship types, you have new engines and, you know, suddenly you have these shifts where you get the Eco ships, for example, which is consuming less fuel, and that makes them a lot more competitive in in the business, in LNG, you have had kind of three different technology changes you had. You started with steam engines, which, of course, most people understand is not very efficient. Then going to diesel electric engines, and then eventually going through modern diesel two stroke engines, which basically reduce your fuel consumption per cargo lifted by 60% so of course, that shipping has a lot more earnings capacity than the older type. So in general, you need to kind of be smart about how you run a shipping company, doing it lean, follow the technology. But the kind of what differentiates the successful owners is that ability to time the market, to kind of read the market, where is it going, when should I exit, and when should I invest? And usually when you're going to invest, that's when the market is broken. But that means also it's very hard to raise capital, because most investors, they don't really want to commit to building new ships, which is going to hit the market maybe in three years time, when the market is broken. But that's kind of where you do the good deals with the yard. You get the lowest price, you get the best payment terms, and you can get delivery windows where you think maybe the market has come up. I'm

Andrew Stotz 21:47
curious if you've ever seen any financial analysts throughout the years that you thought predicted or understood the shipping industry Well, or do you use it very hard for an outsider like that to really get it?

Oeystein Kalleklev 22:00
In general, there's two big stock exchanges for shipping stocks today. It's New York and Oslo. Oslo, it's for more like, historical reasons. This has been a shipping nation since the Vikings. So people has always been focused on shipping. We have, like, a one of the longest coast in the world. It's not very densely populated country, so people has always been out at sea. So actually, the first prime minister of Norway, he was a ship owner. So, we have a lot of families with a lot of tradition for shipping industry, which means that people are knowledgeable about it. And you have these investor communities, which are where is heavy on shipping. Investors. This means that shipping as part of the index in Oslo is very big, yeah. And actually being a shipping analyst in Oslo, it's like being almost like a superstar. You are one of the analysts that gets most in the newspapers, if you go to the US, if you're a shipping analyst, it's like you are above, just above the janitor in the office, because nobody is focused on shipping that people want to focus on finance and tech in these other industries, nobody wants to focus on shipping. So that means that this, there's not been that many shipping analysts in the US. There are a couple which are good, you know, uma Nocta Chapelle. But in general, you know, I see some of the Norwegian analysts, like Rob Walston in Pareto, Leon in DNB and petrogen in our ABG. Those guys are typically always thank the number one, two and three in Norway. So I tend to read those. Analysis is coming out of them more or less every day.

Andrew Stotz 23:50
I i normally will ask you, what's a resource that you recommend? And you're welcome to recommend one. But I also wanted to, I thought it would be interesting, since I have a I train a lot of young people to become sell side analysts through my valuation master class, and I've had about 500 graduates, and since I was a financial analyst myself, they, a lot of them want to become financial analysts. And I'm just curious, like, what advice would you give to a young person that says I want to cover the shipping industry in the future.

Oeystein Kalleklev 24:25
Yeah, now I've been a financial analyst myself, so sometimes I very much Miss sitting in Excel the whole day during the calculation. These days I do more back of the envelope rather than the kind of nitty gritty stuff. Yes. How, how to become, you know, I think you generally, you need to have a understanding of shipping, because it's not as straightforward as people think. People think it's a simple business. You take goods from A to B, so. Reading up on shipping, I would say is good evaluation is not that difficult. It's basically a couple of ways of calculating. You have, of course, the dividend yield. Typically when shipping companies become a bit mature and start paying good dividends, which is quite common in shipping, you can have like a dividend yield pricing, where typically you see yields of eight to 12% flex, I guess is 14% today. Then you have more like the nav approach, where you kind of, you take the like the broker values of the ships, and you kind of, this is the steel value of the company. You deduct the net depth, and this is the equity value per share. Of course, that doesn't really reflect where is the market today. So if the market is really good today, it kind of you have a super profit of being in the market, or you could have, like, a loss. And then, of course, it's like the DCF, where you just have to make assumptions about where the rates are going. But that's really hard to do. Yeah,

Andrew Stotz 26:02
that seems so nav approach is interesting in shipping companies. The last one I looked at, many years ago, each ship was a separate company. Is that the way it's typically done? Yeah,

Oeystein Kalleklev 26:13
typically you ring fence, one ship, one loan, one company. So which also makes it easier to sell it. So if you want to sell off a ship, you can either sell the ship, or you can sell the company

Andrew Stotz 26:23
got it. And then if, if you're

Oeystein Kalleklev 26:27
thinking like Warren Buffett, it's a bit like, you know, I read a lot of Warren Buffett books, and it's like, I think the NAV is like this safety of margin approach. So if you kind of, you can screen this company. This company is being traded at 50% of NIV. So okay, that's interesting. Why is it traded at 50% of NIV? And there can be a couple of reasons, a bad market sentiment, poor management, reluctance to repay dividends. And then, you know, and then, if you but if you have 50% pricing of nav. You have kind of a big safety question, you know, it's, it's, it's limits to how bad that management can be

Andrew Stotz 27:07
because, because, also it means that, in the worst case for the management, they could start selling their ships into the market at market price, and you would realize the nav at the market price, assuming the ship prices aren't going up, would that be exactly,

Oeystein Kalleklev 27:21
exactly like advanced gas? We were that priced 50% of navs. We started selling ships above nav, you know, most with quite good book profit and higher than the analyst estimate. And suddenly we realize the NAV of the company, plus a bit more. But that means that you have management which are shareholder oriented. So it means that the share the management really needs to be tied, in terms of compensation, to value occasion for shareholders. Some, unfortunately, some management teams are not really tied to shareholder value creation. They are more tied to their own value creation because they get a big pay package and bonuses almost regardless of how the shareholders are affected. So so those kind of management teams you should shy away from because they only going to enrich themselves, not not the shareholders and then, but sometimes, you know, some of these shipping companies get hammered on, even though the management is prudent and conservative and and focused on value location, and that gives you sometimes very good opportunities to to make a killing. So if you look at the shipping index here in Oslo, from 2001 to 2000 and middle of 2024 so it's a three and a half year stretch. It kind of it gave the same return as The Magnificent Seven.

Andrew Stotz 28:50
So timing is critical. Yeah,

Oeystein Kalleklev 28:52
it hasn't been so good since last summer, though. So it's done now, and I think it's in a pace where it makes it attractive.

Andrew Stotz 28:59
And when we talk about nav, first question I had about that, is it when, when a company, let's just say a ship is let's say the chartering rates are very high, so the ship is actually quite profitable. Is that profit going into the company that owns the ship, or is it going into the main company now?

Oeystein Kalleklev 29:18
So typically, our ship will be owned by a company, and that company will be doing the charter contract. Then money will flow into that company, and then that company will flow the money up to the parent, and then the parent can decide whether to pay that out as a dividend or paid on the leverage or just build a war chest.

Andrew Stotz 29:37
Okay, so the profit, if there was an exceptional profit at a period of time, it would be accumulating in this ship company, rather than the parent company that owns the ship company.

Oeystein Kalleklev 29:47
It most of the time. Yes, but it could be that the kind of the owner charter the ships out from, like us charting company, so they get the money into that company. But generally. Really, this not is not really a problem. These SPVs are like shell companies, typically domicile and Marshall Island, Cyprus, Bermuda, something like that and and really, nothing happens in those company except for owning the ship.

Andrew Stotz 30:15
And it's like a pass through. Yeah. Pass through, yeah, okay. And so when we calculated the nav and the discounted nav, is it the same as saying price to book value? Or do we need to make adjustments for the value of those ships? Let's say a company owns 20 ships, where the company owns them, 100% I presume, and they're consolidating them. Is it properly reflected in book value, or do we need to make adjustments to understand the net asset value? Yeah,

Oeystein Kalleklev 30:45
it's a good question. Book value is a very poor measurement for shipping nav, because typically shipping prices goes up and down a lot, so their book value reflect where at what price did you purchase the ship for? So if we take flex for as an example, so we bought 13 ships when prices was at rock bottom levels, like 180 180 $5 million so when we then kind of capitalize those ships in the balance sheet, they are capitalized at historical cost minus depreciation. Why ship building prices for LNG carriers today are like 255 to $60 million so that would be the replacement cost, and kind of the long term rates for new ships reflect the cost of new buildings. So, the book value is much lower than the nav. On the contrary, you could have a situation where one shipping company buys a lot of ships on peak of the market at $260 million and then ship building prices goes to 200 then book value doesn't affect. The book value is too high. So you really have to measure kind of the nav towards kind of replacement cost, not historical costs.

Andrew Stotz 32:03
So in other words, what you're saying is it's not like a security where we market to market, and basically it's at the historic cost. So you've got to make an adjustment for where things are at. And if you make that adjustment, and you say, okay, they got, you know, 20 tankers that are a certain size, and those are a certain value, they bought those, the historical cost, let's say, is, you know, 500 million. And the market value of those ships now is 700 million. We would say that there's a 200 million potential gain if they liquidated them. Yeah. Okay,

Oeystein Kalleklev 32:38
excellent. And it's not that hard to get quotes on, on your billing prices. Brokers have them. They're even databases, like vessel value, where you can take out the value of individual ship, or kind of like a benchmark ship, like a new build five year old ships, 10 year old ships, and then you can kind of interfere where the value should be.

Andrew Stotz 32:59
And it's all the is all the value in that in the holding company, is all the value in the ships, or is there additional value that's in the holding company?

Oeystein Kalleklev 33:08
That's always a typically good question in shipping where we have, is it the steel value, or is it also a software value? Is it a brand value, I think, for a general commodity shipping company where you're doing tankers, burgers, products, that's hardly any software value you are. You are a price taker, and nobody is going to pay you more freight because you have a nice brand. So it's really maybe some companies are more leans, so it could have a bit competitive advantage in being lean on costs. But in my general answer is, no, there are some, you know, if you look at Maersk and MSC, like big container lines, they could have a bit of a software value because they have a good booking system. They have sticky customer relationships. So there you could argue there is somewhat software value. I think maybe you could also argue that for some chemical tankers. So chemical tankers, they have a lot of contract of refractments, which is like a volume contract. They have terminals which also creates a bit more sticky relationships with the customers, which could have a value.

Andrew Stotz 34:21
And does it make sense for a management team to say we want to build a company that has some recurring revenue being 50% of the value of our business and then the other 50% being the volatile shipping aspect, or does that end up just not making sense, and it's better just to play the cycles in a smart way.

Oeystein Kalleklev 34:42
Yeah, again, also our question, and we all talk a lot about in the shipping world. So when we sold off all the ships now in advanced gas, we also took our 10, now 12.8% shareholding in our US listed company called beam. LPG, and we took those shares and we dividend them out to our shareholders, because we don't want to be just like a stock where you own stock in a model listed company, so we dividend all those stocks so they have kind of a view that they want to kind of fix about 30% of the freight exposure with long term contracts or derivatives, while they want to be open on the remaining 70% so I think that's more a risk strategy. It depends a bit on your leverage. So if you have debt, you have interest obligation, you have repayment of debt, and you might want to secure some of that in order to attract better financing. But of course, if you don't have any debt, your cash break even is basically your OPEX, and once you're getting to those levels, a lot of people will go bankrupt. So it's really about your risk and your willingness to take risk. Of course, if you are have a high conviction, like we did in advanced gas in 2022 we looked at the market for 2023 and the market looks terrible. Expectation were so low, we said, you know, just, let's just level up the company get more debt, because if we have more cash, we can withstand our poor market. So then we meant when, more or less, or everything spot, and the market took off, and we were really able to capture that super profit during that year, which is something similar we did with Flex LNG back in 2021 but then you need to have a high conviction, and you need to have money in the Treasury in order to be able to bleed, because you might lose some money. But sometimes it's worth it. It's really when you can make the killing, when you're taking Max risk, when everybody's depressed. I'm curious

Andrew Stotz 36:45
about your own personal investing style. Are you much more conservative, or are you aggressive? You know, how do you mirror what you do in your career? Or how do you invest personally?

Oeystein Kalleklev 36:57
Yeah, so that's what I'm doing these days after I left my day job, my two day jobs first of April. So now I'm mostly investing. I would say I own. I only feel I have an edge in shipping and energy stocks, so I don't pick other stocks. Then I might as well buy a fund or index. So in shipping, I understand, since I've been around for 20 years in that industry, so that I'm quite aggressive. Of course, it wasn't the best of days to start as a investor, first of April with this Liberation Day by Trump, the same week. So it's been a volatile April. As an investor, you didn't

Andrew Stotz 37:33
know you're going to be free of your money.

Oeystein Kalleklev 37:40
The shipping stocks been, actually, some of them been doing quite well. The tanker market is really good now. So I've been very long in tankers, which has been a good play, because OPEC is really making a price war. Now. They want to get shale production down. Saudis are tired of holding back production, so we see OPEC really putting more barrels into the market, which is not good for energy stocks. So I don't have a single energy stock in my portfolio, but it's really good for freight because it creates more tanker demand, right? So I'm quite aggressive, yes.

Andrew Stotz 38:12
So yeah, you play the volume price game. When volume is rising, you pay the ships. When price is rising, you pay the energy companies. Yeah,

Oeystein Kalleklev 38:21
yeah. So right now, I think some of the energy stocks are starting to look more attractive. Oil service stocks are really handled on if you look at the OSX, which is the finish oil service index that was launched in 1997 at an index price of 75 today. I haven't checked it's like 55 so you have 30 years with negative returns, no at one, at one stage, this would will turn, but I don't really see the catalyst right now.

Andrew Stotz 38:54
Yeah, I mentioned my interview, episode 597, Lance de pew, and he was, you know, investing in rigs, rig company and that type of thing. And I just remember seeing him being, he's such a smart guy, and then just to see him losing over and over again, it was just like terrifying when I think about investing in that industry. So I think you got to have a stomach for it. Let me ask you the last question, which is, what is your number one goal for the next 12 months.

Oeystein Kalleklev 39:24
I'm not really the guy who kind of plans stuff. I'm in shipping you. You don't make a lot of strategies choice. It's kind of adept right now, I've been off of three and a half weeks, so I've been kind of just settling down reading a bit more books. I'm on a guard leave the first of October, so I can't really do anything for the next five months or so, but, you know, I think I will. I find the shipping industry one of the most interesting industry, because it's such a global industry you have, it's a feel. Small universe. Even though we transport close to 90% of the goods, it's a fairly small industry, and there's a lot of interesting character. It's a very dynamic and you need to be quite kind of versatile in your skill set, because what Fed is doing, what the politicians are doing. It all affect the industry, China, US, trade relations, geopolitical events, it all affected. So you really need to be on top of contemporary issues in order to be a successful shipping investor. So that's why I think that's one of the most interesting industries to be. That's such

Andrew Stotz 40:39
a fascinating thing about not doing a lot of strategy, but trying to adapt to what's coming at you right today, and that's so different from so many industries. So I really, really appreciate learning that. I'm just curious about Norway, do they have good records of ancestry, for instance, where you have been out on boats, or family that's been on the sea, or any interesting things in your ancestry. I grew up at

Oeystein Kalleklev 41:07
the sea. We were always going out in both my grandfather, he worked for Stotz Nielsen. Stotz Nielsen is the biggest chemical tanker company in the world, probably, so my grandfather worked for that. I walked in the shipping industry for 20 years now. So of course, we went out the window. You can look at the scene. So it's in

Andrew Stotz 41:30
your blood. Yeah, it's in your blood. 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, and I think this helped us to think about how we manage our risk in the shipping industry. As we conclude Austin, I want to thank you again for joining the 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?

Oeystein Kalleklev 42:01
Oh, thank you for inviting again, and I will be listening to more of a few episodes.

Andrew Stotz 42:06
Thank you. And I really enjoyed it myself. I think I learned a lot, and I'm going to share it with my students in the valuation master class, because the discussion about the valuation and all that, I think will help them understand the industry. So I appreciate that, and that is a wrap on another great story to help us create, grow and protect our Well, 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. You.