Investing Unscripted Podcast 104: 3 Things to Know Before Buying Your First (or Next) Stock

Learn a few things about your goals, yourself, and your investments.

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Jason Hall: Hey everybody. Welcome back to Investing Unscripted, where we ask and answer the hard questions about investing. I'm Jason Hall joined as almost always by he who is the voice of the people, my dear friend, Jeff Santora. Hey, Jeff. 

Jeff Santoro: Hello. How are you, sir?

Jason Hall: I'm great. I'm wonderful. I'm almost completely back. 

Jeff Santoro: You know, it's, it's funny. We recorded the last episode a week before it went live and I was listening to it the day before it went live. And even in that, whatever it was, week long span, you've gotten, you had gotten so much better. So yeah, this is a big improvement from the last recording we did.

Jason Hall: It is. It is. Well, so this is an interesting thing. This, the show that we're going to do today is actually really related to. The, the, the last show that we did, which was one of our kind of more [00:02:00] organic conversations, that's pretty broad and wide ranging. But we decided we wanted to do something that was kind of in the, in the same vein, but it was a little more focused.

And this, this show is titled, this is a working title. That's probably going to be the final title. Three things to know before buying your first or your next stock. 

Jeff Santoro: Yeah, we should, maybe we should just decide on the titles before we record. So we don't keep saying it's, it's a potential working title.

That's a terrible idea. That would be too, that would be too scripted. That would be off brand. 

Jason Hall: It is. And we're not investing scripted. No. So now, now I'm saying the thing out loud, so I'm not going to say any more. Jeff housekeeping us, 

Jeff Santoro: please. All right. Thank you to the people on Spotify who continue to give us ratings.

We really appreciate that. We need the Apple podcast listeners to step up and do the same, um, entitled, entitled. Yeah. Seriously. Apple podcast. Come [00:03:00] on. Apple people. Apple. And obviously ratings and reviews are super helpful, help people find the show. The newest thing I want to just remind people of is we, we have a portfolio up on savvy trader.

com. You can just search for Investing Unscripted on that platform. Or also there's a link in the show notes where we have a portfolio we put together that we're going to add to each month with commentary on the picks we make. It is a subscription thing. So if that's something that's interesting to you, please check that out.

And other than that, keep sending us feedback, questions, ideas for the show. We really appreciate all the interaction with, with folks on any social media app or email. All right, Jason, I want to say 

Jason Hall: one thing real quick about the Savvy Trader portfolio. I've started kind of playing around with a little bit more and the community aspect, I think is really neat.

I've already started sharing as we're coming through earning season, I've already started sharing some insights and notes on, on the portfolio that subscribers that that's only place you're going to see them. So, it's a place to get really clean, unfiltered conversation about those companies in our investing process, completely separate from all the [00:04:00] other stuff we do.

One of the, that's one of the cool things about it. All right. I'm, I'm, I feel like I'm shilling right 

Jeff Santoro: now. So I'm going to shut up. No, I'm glad you, you highlighted the community aspect because that's, that's the part I'm actually most excited about that, that can grow over time. We can interact with people a little bit more.

All right. Jason, as we start to think about. The three things that any investors should know before buying their first or next stock, we, we bucket that them bucketed them. It sounded weird when I said it it's a word into, into three buckets, oddly enough, and the first one are some points around.

Understanding markets, we feel like if you're going to be an investor, if you're going to start buying individual stocks, it's important to just understand the, the way the stock market works, all the stuff that I discovered as I got obsessed with this a few years ago, and you discovered a longer, a longer time ago than that.

But what are some things you think as it pertains to the markets generally that. Investors need to know before they get started. 

Jason Hall: I think as a starting [00:05:00] point and I'm going to reverse the order of, that we put these on our outline, um, internally. So again, 

Jeff Santoro: I'm saying the things out loud here. And so I think this gives people like an insight into it's like behind the scenes information.

So maybe it's a good thing. We should 

Jason Hall: do more of that. I think the biggest things that you absolutely have to come into it, both with the understanding and the ability to own stocks that can fall in value incredibly quickly and potentially by a lot the great, uh, Morgan Housel has talked about that kind of, that the reality of.

Volatility in the stock market is the price of admission, right? When you're, when you're the owner, you have to deal with volatility of anything that's traded on public markets and it can be brutally painful. And number one, having the, the understanding, right? The, the emotional understanding that it is a feature of investing in public markets [00:06:00] and publicly traded assets.

And not a bug, not a flaw. is useful, but you also have to have the actual financial ability to do it. Right. 

Jeff Santoro: Yeah. Um, yeah, those are, those are two. Really important points. The thing I was going to say when you were done, which was like, it's the whole don't invest any money You can't afford to lose because you might and yeah, The other thing I wanted to say, as you were talking was about the falling of a stock being a feature, not a bug.

I think that you have to have to know that. And that also that just because something does fall a lot in a short amount of time doesn't mean that it's a bad investment either. For example just this past week, several of the stocks I own saw double digit drops after earnings and some of the best stocks I own, in terms of like total returns over the times I've owned them have been stocks that have at times dropped 20 percent in a day. [00:07:00] So not only is it a feature, not a bug, it's also a feature of some of the best companies in the world. So that's another kind of twist to that that I think is important to mention.

Jason Hall: Here's a neat little piece of trivia. Jeff, and I learned this with, with data dog that just reported. Um, and it's really fresh because that's a company that just reported the week that we're recording this episode. I went back and look this, that's one of the stocks that fell a pretty big amount after reported earnings and since the beginning of, of 2023.

So that covers six quarters that it's reported earnings. They've had a big earning sell off four out of those six quarters, Jeff, here's the thing. The stock is up like 60%. Since the beginning of 2023. We, we always call it volatility when stocks fall. But you know what else is volatility?

When stocks go up, so you have to remember that. 

Jeff Santoro: Yeah. And I know, I know referring to Amazon is a, is an investing trope. It didn't Amazon, [00:08:00] not in a day, obviously, but didn't Amazon have multiple 90 percent drawdowns over the course of its history? And it's been one of the best performing stocks of all time.

Jason Hall: Well, not just Amazon. Look at, look at Netflix. You'll see. The same thing. Look at alphabet Apple. Yeah, these are, these are great stocks and we're cherry picking some big winners, but they, they, they do it right. And I think that's actually a good um, transition into the next point that I wanted to make.

Great stocks aren't the only ones that fall a lot. All stocks do. Yeah. The bad ones fall too. 

Jeff Santoro: Obviously. The 

Jason Hall: bad ones fall too. And the, this is the big reality is that, so you have the market average, right? Which is that roughly 10 percent annualized rate of return. But the stock market almost never has an average year, right?

So you never, I, I, I mean, I, like over the past 15 or 16 years, I can basically think of one year that was around 10%. The market actually went up about 10%. It's usually up 25 or down two or up 17 or [00:09:00] up four or whatever, right? It's, it's, you never, you never actually see the averages. And as a matter of fact, most stocks, Jeff, a majority of stocks.

Underperform the index and it's not even close. So to me, that's to bring kind of a sports analogy in because we're so hardwired against loss aversion, this is maybe one of the hardest things about investing is we try to make every stock pick perfect. Then we look through our portfolio and we see.

Well, that, that sucks down 15%. The market was up 35%, but this stock was only up 28%. This stock was up 75%, right? And then what do we do? We sell, we sell a bunch of the one that was up 75 percent and then reinvest it in those, in those other ones. The reality is chasing losers. To try to, you know, average down is probably a bigger, especially when you're selling off your biggest winners to fund [00:10:00] that averaging down versus just focusing on the, the, the narrow few that are actually the winning businesses, because in the history of the stock market, it's just a narrow few that generate all of the alpha, and the generate, the vast majority of the total returns is just a narrow few companies. We forget that or don't know it. Nobody ever taught it to us. And and we focus on, we focus on watering the weeds. 

Jeff Santoro: Right. And. You know, I, I think the statistic you always hear is, you know, even a good stock picker is only right.

60 percent of the time in terms of, you know, individual stocks they've picked and their ability to beat the market. And I think it's probably good to try to try to beat that if you can, like, that's like a goal, but it's not the kind of thing where, especially when you're new, it's not the kind of thing where you're going to pick 10 stocks and nine of them are going to, you know, Be winners.

That's just not, that's just not the way it works, which, which is a good segue also into our next point, which is that earliest success is probably luck as much or more than it [00:11:00] is skill, right? 

Jason Hall: If you came to investing in say the spring of 2020, Jeff's raising his hand for those that are just listening to the podcast like probably a lot of you that are listening to this, guess what you were really lucky You were really lucky that you fell into investing at the best possible time in the past half decade to see very quick feedback from the market about your in your head skill, right?

Because again, that crazy round trip we saw with the stock market from the February, 2020 peak, the bottom in late March to the gaining back all of its losses. I think it was like nine months was the, the, the. From the peak through the trough and then recovering all of the losses, uh, just a remarkable period of time, something like 70 percent of stocks gained in value over that period.

Again, the numbers. Prove out that that doesn't that doesn't always happen, right? So yeah, and I [00:12:00] I raised my hand for you. Yeah, go ahead You know, you know, yeah go ahead with yours and then I'll 

Jeff Santoro: ask 

Jason Hall: the 

Jeff Santoro: question I was gonna say I raised my hand because I was one of those people who Misattributed my success to skill rather than luck and I was very quickly Convinced otherwise as the market turned in 2022.

But what was interesting about that particular period, it wasn't so much that the big winners won. I'll use zoom as an example, because that was the one stock I bought during 2020 and 2021 that when I just an incredible run and I was mildly bragging to my friends who didn't care about investing, but it was the exciting, shiny thing that I was obsessed with that my zoom stock was up, whatever, 170 percent from when I bought it.

And I. I want to say I was smart enough to know that that couldn't last forever, but at least there was a story you could tell yourself with Zoom that people would be doing online meetings forever and that growth could stay. What was more remarkable, I think, about that period of time in the market was everything went [00:13:00] up.

You know, you could tell yourself a story about why Zoom went up. It's almost everything else I owned on almost any day was going up. And that's the part I think that probably tricked a lot of people and had them think that they're the world's best stock pickers. And obviously that that turned around. What was your question?

What did you want to ask? 

Jason Hall: So I want to ask you, and this is a little fresher on your mind than it is for me again, because of the difference of when I really started focusing on buying individual stocks. And when you did, is the. There's definitely some positive aspects to early success versus early failure.

And my question is for you, do you think, netting everything out your first six months or nine months, let's say as, as a, as a stock picker, was that success beneficial to you or do you think it was more harmful over, over the next, you know, six or nine months that 

Jeff Santoro: followed it. 


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I may be an outlier to ask that question too, [00:15:00] because simultaneous to me finding individual stock investing was, you found me, I found you and you complete me.

But simultaneous to that love story was also that I became Very obsessed with the learning aspect of it. So I it's hard to say I don't know what the counterfactual really would be I'd like to think that Because of my obsession about learning about it and because I was using like embarrassingly small amounts of money I might have ended up in the same place either way You know, had I started in a crazy bull market or a really bad bear market.

But I think for the average person, especially someone who's younger, because I do think I, whatever mindset I did have five, four years ago was partially due to the fact that I was 40 and not 20. But I think for most new investors, especially younger investors, like young adults who are just kind of figuring out the world generally, I, I have to think it's better to, to, to experience success first than [00:16:00] failure.

Because when you don't really understand how the, how it all works and you buy something and it goes down 80 percent in three months, you could very easily be like, this is rigged. I'm done. I'm never doing this again. The stock market is only for, you know, certain people. And I'm not one of those people.

And I could see how it could turn yourself, turn you off from investing entirely. I would hope it would only turn you off from stock picking and you would still have like, you know, a mutual fund in your 401k or something so you can retire eventually. But Yeah. I don't know. It's hard for me to say for the way I would have been, but I think for most people, the answer would probably be to have have early success.

Jason Hall: Yeah, I think that's, I think that's fair. And to your point I think we're, you know, thinking about this on the, on the two extreme ends of the pendulum of, you know, those early days of the pandemic is being such a perfect opportunity. And then the, the, like the, kind of the inversion of that really is October of 2021 for anybody that would be really concentrating into like [00:17:00] cloud stocks or really high growth tech software as a service sort of businesses because While the S and P 500 and the other, like the, the, the Dow and like those big indices peaked, uh, at the beginning of 2022, like the first week of January of 2022, it was October of 2021 when the NASDAQ 100 peaked.

So people that were really chasing those really big, super hyper growth investments. That invested in that period lost a ton of money, right? Over the next six months, really a year and a half almost. And while the S and P and a lot of those more diversified portfolios have fully recovered, and, and, and March to new all time highs, those people never have never recovered. And again, but those are two extremes. And I think kind of, for me, the reality for most investors is. You start out and you invest in five, 10, 15, 20 stocks, and you have a couple that do [00:18:00] really well or maybe do fine.

And most of them are just kind of in the middle of the road, but then maybe you have that one or two that fall 50 percent or more, right? Just, and that's, that's the pain. That's the lesson where you don't deal with like permanent loss of capital. Like people that would have started in that peak period and the riskiest, most overvalued cohort in the past two decades.

And invested in that have really suffered permanently. Um, particularly if they've walked away from, from, from the stock market, you know, you learn those one or two painful lessons with a little bit of success. So with a little bit of the carrot and the stick I think maybe that's the tuition that pays off the most.

Jeff Santoro: So as it pertains to our first thing to know before you buy your next stock or your first stock, which is understanding the markets, what is there anything else in this, in this first one that you want to make sure we cover? Yeah, this is something new. And 

Jason Hall: I talked a lot about last week and we talk about a lot and that's Having goals, right?

And, and defining your goals and separating goals from aspirations because we [00:19:00] all have the aspiration as stock investors of getting really rich, right? Let's, let's be honest. We all hope we buy Amazon in 1997 and hold it right for, for 25 years. And we turn 1, 000 into, you know, you know, 900, 000 or whatever it's done.

And instead of just being comfortable when we retire, we've got. A couple extra million dollars laying around because we remember Netflix was out there and we bought that in 2002 also, right? We all hope that's what happens. But that's the aspiration, right? And we can't to, to. To crib your statement earlier about not risking what you can't afford to lose trying to get what you don't need.

You know, I think that's the key because you identify your actual goals. And to me, the win is more important than the what. So for example, retirement is a goal. Putting your kids through college is a goal. Maybe retiring early is a goal, right? Or, or, you know, buying that vacation home when you're 55, right?

Before you retire. Those are all actual [00:20:00] goals, but they're all just some future allocation of fund, right? Funds that you, that the win is the thing, right? Your kid, your kids in first grade, you know, you've got 11 years. before they retire, before they start college. You know, you probably have 25 years from that same period before you're going to work, however old you are right before you retire.

And how long you have is more important to defining how you're going to allocate your resources to, to generate that wealth then, then whatever the hell it is you're paying for. So I think that is so important. Because that defines, Transcribed You know how you're going to allocate your funds helps you thinking about that.

That that The first couple things we talked about about the feature of the market is stocks are going to fall if you're investing for a goal, that's 5 years off You absolutely have the capacity to hold through through downturns, right? Because you don't need to turn that asset into cash, [00:21:00] right?

You can ride through it. You can absolutely ride through it. 

Jeff Santoro: And I, I feel like that having a goal, knowing your goal, and we talk about this a lot, is the key. Absolutely. Part of that. Our first kind of point here about understanding the markets. But I also think it's a big part of the second, the second thing, which is understanding yourself.

Jason Hall: Yeah. 

Jeff Santoro: And I think of this point, you know, point number two of understanding yourself as being I would almost subtitle the episode as, “three things to know before buying your first stock.” And then the subtitle being, or, or learning if you should be an index funds instead. Yeah, because I think a lot of the understanding yourself aspect of what you need to know before you start is to determine whether or not picking individual stocks.

Is right for you, and that's partially related to your goals, because like you said, while we all want that great story to tell that we held Amazon for 30 years, and it's up 10, 000%. The goal is really to retire comfortably or to put your kids through college or whatever it is, right? And I think you're [00:22:00] that goal setting and also your mindset and your risk tolerance and all those things are the first like filter you need to go through to determine if this is this is right for you.

Yeah. I, I think another one in the understanding yourself bucket is you have to ask yourself what's your willingness to an interest in learning more about investing in individual stocks. It's not the kind of thing that you can do just mindlessly or by, you know, you have to do a little bit of work.

Yeah. And I think even if you're signed up for outside 

Jason Hall: of outside of periods like the spring of 2020, you can't just randomly pick stocks, right? 

Jeff Santoro: Yeah. It's a skill. It's a skill you need to work on. For sure. Right. 

Jason Hall: Right. You have to identify the, the ones that have the best probabilities of generating returns within all of the frameworks around what you're looking for.

That is so important. 

Jeff Santoro: Go ahead. Yeah. I was, I was just going to say. And it's okay if that's not your [00:23:00] interest, but it also means you probably shouldn't at least not put a lot of your money into individual stocks. Like I'll give an example. I think if you if you subscribe to like a stock picking service or a newsletter and you want to dabble in stocks with some small percentage of your overall portfolio just because like it's fun.

You're so you're sort of interested. Maybe you like the kind of gambling aspect of it. I actually don't think any of that's bad or wrong. It's. an amount of money that you can afford to see go to zero if it does because the chances are, if that's your approach, you're not going to be very good at it. You, you will likely move, lose to the market and you will possibly lose money.

I think if you have any chance. of beating the market, then you do have to put a lot of time in. And you know, you and I are good examples. Like we put a ton of time and effort into it because we like it. And I think we each do pretty well as investors, but I wouldn't say either of us is Warren Buffett. So it's like, you know, [00:24:00] even when you do put a lot of time in, the odds are probably, I wouldn't say stacked against you, but.

Yeah. It's still not guaranteed you're going to win, right? So I think that's like, I have 50 

Jason Hall: years to prove you wrong about that. 

Jeff Santoro: Well, but I think that's a basic thing you have to ask yourself. It's true. And if, and, and, and honestly, if the answer is no, go buy an index fund and relax for the next 35 years, you'll probably have more free time and less stress than you and I do, and probably be just as wealthy.

Yeah, I think that's 

Jason Hall: important. I think there's a couple of things to build on it too. I think you're 100 percent right that you, if you don't enjoy it, right, if you don't enjoy the pursuit, if you you know, there's a lot of intellectual pleasure you can get out of doing this too, right? You learn new things, you get to explore exciting industries or, or maybe boring industries too, as far as that goes, right?

But you get to, you get to have some intellectual pleasure out of that pursuit, which I think is, Um, maybe under, underappreciated by a lot of people that are you know, trying to, trying to create wealth. But I think there's another thing too, like you can, if [00:25:00] you have a special skill if you work in a high growth industry where there's opportunity and you have special knowledge, I think there's absolutely an opportunity to try to leverage that.

Maybe most of your investments are still in ETFs, but because of your special knowledge maybe you work in some field in technology, you know, you can take 10 percent of your wealth and you can turn that into outsized returns. But if you're wrong about a couple of things because you're blinded, you're not creating like existential risk to your family's wealth, right?

That's another way to do it. You mentioned some like the stock picking services out there, I have two schools of thought about it. I think number one, it can be a great jumping off point for research, you know, kind of the top of your filter of finding great ideas. And then you can take that and have that more narrow focus.

If you have less time to take their 10 best ideas and, and find the ones that you think have the most potential or they fit your portfolio. And again, you're not just reading their research and then, and then throwing You know, just [00:26:00] being a chimpanzee throwing darts at a, at a, at a dartboard here.

You're actually doing further research, right? With it. You're using it as the starting point for your research, or you buy the whole damn thing and you sit there and forget it. You, you trust them, you buy it. And then the next month or the next quarter, you just do it again. And they're providing research and transparency about their results.

So you have the ability to see it, but you're not. Looking at the portfolio every day and second, and second guessing and judging every stock based just on the stock movements without actually doing any damn work yourself. Right. I think that's another way that you can go about it. 

Jeff Santoro: Well, because if you hire a money manager, that's essentially what you're doing.

Jason Hall: Right. Exactly. You're not hiring 

Jeff Santoro: a money manager till second guess their choices. You're saying, take all my money and invest it. And you know, this is just like a lower cost way to do that where you have a little bit more transparency and a little bit more ability to do your own research. 

Jason Hall: Yeah. I think there's one, one other point I want to make about this too, that I think is important.

Figuring out about that [00:27:00] willingness to learn another part of it too, is, is figuring out your willingness to deal with, you The volatility, right? So we talked about this a lot. I do think one of the best ways to inoculate yourself against selling a winner because you're afraid that. It's going to start falling and you don't want to, you know, you don't want to lose out on those, on those gains, right?

You want to sell the top or whatever, just as much as selling, avoiding selling a stock that's gone down, that the business is still perfectly fine. I mentioned Datadog as an example, right? You know, you, you get, you had four out of six opportunities to sell because it looked like it was in trouble. Or it had topped out over the past 18 months when the reality is that this is still a great business.

It's going to grow. But if you don't know anything about the business, you know, fear takes the wheel and you sell. So it helps you inoculate it. But if you just find out that you're not wired to be able to do that, you know what? The ETFs are a great way to invest because you know what? We talked about Amazon and Netflix and their big, those big drawdowns they've had in the past.

You buy ETFs, you still have [00:28:00] exposure to those businesses, right? Those few that generate most of the returns, they still do it inside ETFs. You just don't have the individual risk of owning a concentrated portfolio of just those individual stocks. And you won't screw up the good ones because you can't see the good ones because they're masked inside the ETF and you just see the total returns.

Jeff Santoro: Agreed. And I think. Kind of related to this but maybe a little bit differently, it's, it's at least related to an earlier point we made about goals versus aspirations and it, and it falls into this bucket of understanding yourself, which is a question you need to ask yourself is, are you willing to get rich slowly?

Because I think what draws people, a lot of people get drawn to individual stock picking. At the beginning, because you, it's FOMO. You, you hear about a friend who bought this stock six months ago and it's doubled. You, you're on Twitter and you see all the rocket ship emojis next to the stock tickers from the people who are touting their.

[00:29:00] success has investors. And by the way, they'll be very quiet when their stocks go the other way. Hey, Jeff, congratulations about outset medical, by the way. Thanks, man. but honestly, you, you, if you're not willing, if you're not willing to be to say to yourself, it takes a long time to build wealth, then it's probably better again, just to DCA into a dollar cross average into an index fund and not be actively into it.

Because yes, you will find it will happen to you at some point. It's happened to me and I've only been investing for four years where a stock has gone up a lot in a short amount of time. My NVIDIA position is up 365 something percent and I've only owned it for four years. Now that is not a brag.

Cause as I said before, it's, I think it is at a total of 500 total money right now which tells you how small of an amount I started with, but, and that is a, you know, if that were 10 times that amount for me. I would be [00:30:00] very tempted to not only sell that and use the cash for something, but I probably think I'm more of a genius than I am.

And that I would have to stop myself and say, this has been great. And maybe I will at some point sell something on the shorter side and use the money for something. But that is not my goal here. I am very happy to get rich slowly and over the next 10, 15, 20 years that I continue to work. And not worry about it for a while.

Jason Hall: Well, again, using the idea of, of a bell curve, when thinking about human temperament, this is important because understanding yourself and it not being binary, where you either need to be all stocks or all the ETFs, there's a broad range of how much of your portfolio you put in individual stocks versus.

You put in more diversified assets that's between zero and a hundred and a hundred and zero your mix. But so much of that is about understanding yourself, your time availability, your willingness to [00:31:00] work. And the big one though, like you were talking about Jeff is, and we, we talked about it as the idea of being patient and that's part of it, right?

Patience and, and willing to play the long game for delayed gratification, but it's really just temperament, right? Understanding your temperament because. You can't just change your temperament. But we talk so much about frameworks and this is what I've really come to understand over the past year and a half.

Jeff is the idea of frameworks. All of the thing that we, that your framework is built around is optimizing for yourself, right? How you process information, how you respond to positive and negative stimulus building in friction to limit. The self harm, which I think is more important than than any other aspect of being kind of an amateur investor for anybody that's not being paid by somebody to invest money for them, or a hundred percent earning your income off of investing your assets, you, you have to build in processes to limit self [00:32:00] harm first.

And then your framework can leverage the things that you're actually talented at. Next.

Jeff Santoro: Hey everybody, we'll be right back, but first, a word from our sponsors. Earlier in the show, you heard us talk about investing platform . That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave public five out of five stars for options trading.

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I think, I know that this isn't part of what we. Sketched out in our outline, but what you just said about frameworks and knowing yourself got me thinking, listen closely 

Jason Hall: here, people, bonus content, 

Jeff Santoro: bonus content behind the scenes.

No, but I think it, it reminds me of the fact that you have to know [00:33:00] yourself in terms of the way you're going to do the work you need to do to learn about stocks. So for example, the running joke on the podcast is my nerdy spreadsheets and the fact that. You write almost nothing down. But that's because that that's you as an investor.

You have, and I'll give you a compliment here. You have a very good, from what I can tell, just memory of things. Like you'll, you'll remember, Oh, three quarters ago, this company did that. And I, that's not the way my brain works. I need to put it down somewhere and then go back and look at it. And that might jog my memory.

I might be like, Oh, yeah, I remember this happened to that company three quarters ago. But I think in terms of frameworks and knowing yourself, this will be the last point on the no understanding yourself part of this. You know, that also feeds into how you're going to allow yourself to learn and follow companies as.

as they report quarter after quarter. All right. So the last step here, if you've already figured out how, if you already learned how to understand how the markets work, if you've learned how to understand how you work, [00:34:00] I think the last step is there is a degree to which you just need to understand financials.

You have to understand a little bit of accounting. You have to have a basic math understanding. You have to understand how businesses work. And I I'm curious what you would What you think is the most important thing here. I think you really need to spend the time to understand your way around the three big financial statements that get put out by companies every quarter that are audited.

So the cash flow, the cash flow statement, the balance sheet and the statement of operations or P and L it's called sometimes. So those are only audited annually. Okay, I apologize. They are out every quarter and only audited annually, but knowing your way around those and how they are organized and what all the lines on them mean is not rocket science, but it does take some time to dig in and learn it, but it is a wealth of knowledge and information.

And I think for me, cause I. nerded out on that kind [00:35:00] of early on. And I feel like I learned a good chunk of it quickly. Still a lot I need to learn, but I got to a point where it was like enough to be dangerous. For me, it was like eyeopening because there's a high degree of pattern recognition when you look at those statements a lot over and over again, either the same companies quarter after quarter, or even different companies, you know, Quarter versus other, you know, other ones.

So I'm curious what your thought is on, on the degree to which it's important to understand accounting financials and specifically those financial statements. 

Jason Hall: Yeah. So I, I love what you just said about knowing enough to be dangerous. Because this is like a reality for investors. Once you get some basic understanding, then you start just, you turn into a bull in a, in a China shop, like a really, really, really like cocky bull in the China shop too.

Because you read these things and you start thinking, well, all right, I know what a price to earnings ratio is now. And I know what a company that has a lot of debt looks like. And then you [00:36:00] start up misapplying some of these things across different industries and sectors where a balance sheet or a cashflow statement might look very, very different.

Margin profiles might look very, very different. I want to give like an example of that, Jeff. Two companies that are very, very different, Starbucks. Retail business, massive buyer of our products focused on consumers. It's super duper high margins on the front end, uses a lot of technology has used some debt, but it's not super high leverage.

And then compare that to like Brookfield infrastructure partners. It's infrastructure. It's boring. It's slow growth uses a ton of debt. To acquire these assets, paying a dividend it's becoming a bigger deal for Starbucks, but for Brookfield, it's always been a big deal paying the dividend and growing the dividend.

If you were like a growth investor back in 2010, looking at Starbucks and somebody said, Hey, look at this Brookfield company. You'd be like, what is that garbage? They own. They own. They own. [00:37:00] Wastewater treatment plants and toll roads. Why am I looking, why would I look at that? And they got all this debt.

Why would I want to buy that? They've both since since Brookfield went public and went public in 2007, Starbucks have been public longer than that. They've both generated like 820 percent in total returns, right? They've both been incredibly like market more than doubled the market over that time, wonderful, huge winners.

But the way you analyze the businesses is very different. So 

Jeff Santoro: yeah, you're going to see very different things on those financial statements for those two companies. If you tried to compare them just based on that, you'd get confused. 

Jason Hall: Yeah, absolutely. So that's, so I think that's a really important thing too, is taking the initial under like financial knowledge that you have, and then.

Being willing to be humble about the fact that you don't know everything and that you need to apply different filters, looking at different industries and different companies and even different companies in the same industry, depending on where they are, maybe in their growth profile or how they're looking to do it.

Disruptors a lot [00:38:00] of times do things in a very different way. The legacy companies do in an industry and you have to kind of have that imagination. So probably the humility aspect of understanding financials and, and, and realizing you don't know 95 percent of it versus just applying the same lens to everything that you look at, because you miss so many opportunities when you do that.

Jeff Santoro: Yeah, I agree with that entirely. I think the knowing enough to be dangerous aspect, I think what's encouraging about If you look at these financial statements for the first time, cause you're a new investor and they're intimidating to you. I think what's encouraging is getting from zero knowledge to enough knowledge to start making some informed decisions.

Doesn't take an incredible amount of time. It's getting beyond that. That does take a little more digging. There's a really good book. And by good, I mean, incredibly boring at times. Called how to read a financial report. It's by an author called John a Tracy. You can just Google that or if I remember, I'll put the link in the show notes and it goes, I'll, 

Jason Hall: I will definitely always put links for books in the transcripts.

So sign up at [00:39:00] investing on scripted. com for our newsletter and you'll get the transcript in your email the day the episode comes out and you can find the link right there too. 

Jeff Santoro: But I found that book after I had what I would consider to be a basic understanding of those financial statements and it really, really solidified a lot of good things for me.

So if you've not. really understood those and want to do a deep dive. That's a book I would recommend. But like, just as an example, Jason, like when I learned that the statement the income statement is basically like a funnel, right? Like the revenue is the top of the funnel and earnings is the bottom and learning, learning that like you take revenue, you subtract cost of goods, you get gross profit, you subtract your operating expenses, you get operating income, you subtract interest and other stuff and you get earnings, right?

Like that basic structure that it's just like cascading down towards the bottom. That's why it's called the bottom line. I just heard it explained that way in a more elegant way that I just put it. And I was like, Oh my God, that makes so much more sense now. And then you start connecting Well, how does the income statement can actually connect to the [00:40:00] balance sheet and the cashflow statement?

Like where do these things show up on the other things? 

Jason Hall: So that's so important, right? The difference between like an income statement and a, and a cashflow statement, very different earnings is not how much cash the business. Generated at the end of the period, cashflow and income can be very different things depending on the, the, the industry and the business.

Jeff Santoro: And you know, you, then you start making connections. I think what also helps newer investors is to make the connections between your own personal finances and, and business finances. So I think cashflow makes sense to a lot of people cause we all know like how much cash is in our checking and savings account.

And some of the gap accounting can be a little bit more wonky because it's, you know, There's, there's not much depreciation and, and amortization in our personal finances and things like that. You don't take goodwill write downs on your checking account, but and you don't recognize revenue, right?

That's, that's, that's like, that's a big one. You don't have accounts receivable and payable. It's like that kind of a thing. You kind of, you kind of do, I guess you kind of, I can kind of 

Jason Hall: do. But, but I [00:41:00] think that's, that's the key, right? I just want to say a little bit more about that because just to give people a taste of how important this really, really is.

So you think about, we talk a lot about like the cloud companies and the tech software as a service companies on the videos we do. And also on the show, um, when we're talking about earnings and companies that we, that we really like is a company may take an order for a 12 month contract and they may.

Have a deal where the company prepays for a full year of services, right? Well, guess what happened? They just got the cash flow. But they can't actually recognize the revenue and until they provide the service or the product that's related to that revenue, right? A customer may pay a deposit for a million dollar in goods, that's going to be delivered next quarter and maybe they pay 20 percent down.

You get that 200, 000, you got the cash right now. So that's your asset, but you know what you have on your, on your books. You have a liability now too, to provide the good or the service to that company at some [00:42:00] point in the future. And then you recognize the revenue later, right? Well, okay. You recognize the revenue, you run everything through that filter, cost of goods sold, all that kind of stuff.

And you get the profit at the end. But you've already gotten the money or a portion of the money, right? So being able to follow the nuances of cash flows versus versus revenues and the operating statement are so, so important to being a successful investor. 

Jeff Santoro: Yeah. And there's one more thing that's related to this that I want to touch on before we wrap up this part of our conversation.

And that's, there's the gap accounting, which is generally accepted accounting practices that standardized that shows up on these income statements and cash flow statements and, and balance sheets. Then there's adjusted things that companies will often put in press releases and sometimes even in the 10k and the 10q to give what they think is a different view of the business.

And that I feel like is the transition point. To what is a lot [00:43:00] of times companies spin and not reality. Yeah, as soon as you start adjusting anything you are, there's no standardization for adjusted anything. So adjusted EBITDA at Jason Corp could be, or Jason Corp could be very different than adjusted EBITDA at Jeff Corp.

And that's so important, right? Because EBITDA 

Jason Hall: is technically a non gap metric, Because what it is, is it's earnings before interest, taxes, depreciation, and amortization. So if a company says, here's our EBITDA, That's already adjusted. Well, it's, it's non GAAP. It's non GAAP, yeah. But it's, but it's not adjusted, right?

So that's important. So if, 

Jeff Santoro: Oh, yeah, yeah, yeah, I, yeah. If 

Jason Hall: Jason Korp says, my EBITDA last quarter was this, and then Jeff Korp says, well, my EBITDA was this, 

Jeff Santoro: That's already have the same thing. 

Jason Hall: We've given you the same number. Oh yeah. That, yeah, yeah, yeah. But it's a, it's a non-gap number. Now if Jason Corp says, our adjusted EBITDA number was this, and then Jeff Corp says, my adjusted EBIT number was that we may or may not be giving you the same number depending on the adjustments.

That's so [00:44:00] important to remember. And you, you see, Jason Corp never adjusts stock-based compensation, by the way. Jeff, Jeff Corp. Always adjusts, always adjusts 

Jeff Santoro: for stock-based compensation. Always. Yes. And, and look, uh, we don't need to go into the weeds on this in case. There's some like actual beginners listening who are just confused by these.

Acronyms and stuff. But the point is, there's a lot of companies spin in press releases and in earnings calls. And I think this is tied to understanding financials. The reason you want to really understand the gap accounting and how it works on these financial statements is because it is a, it's a filter for all of the stuff that management's going to tell you.

It's a bullshit filter. It's a bullshit filter. That's a good way to put it. Yeah. Yeah. Yeah. Yeah. Because, you know. Sorry kids mom is that I'll explain what that word means the executive team's job is to present the company in the best light without lying 

Jason Hall: Well, it's real simple Jeff the the the 10 K's which are your annual reports your 10 Q's which are [00:45:00] your quarterly financial statements and then the 8k Which is a report, an unscheduled report of material information, like a press release or a presentation or something like that.

Those are filings with the SEC. Those are disclosures, okay? They're disclosing and filing required information with their federal regulatory body, right? So this is what happened, right? All the presentations, the press releases, all of those things. Those are what management wants you to focus on. So yeah. Think about it that way. 

Jeff Santoro: Yeah. And there's some tips and tricks we've talked about in the past. Like if a company reports. Something that's non gap because that's optional. Whether you're, you know, if for example, subscriber numbers, you don't have to give out subscriber numbers if you're Netflix, but they do actually, they're going to stop.

Right. What's the one they're going to stop doing? Is it total subscribers or something? Anyway. 

Jason Hall: I think I think important part of that Jeff is that is that we're not saying to dis. And now our good friend Tyler Crowe [00:46:00] would say ignore everything that they tell you and just focus on the filings.

And I think that's unfair because the reality is a lot of like the KPIs. The industry specific metrics. A lot of those things are not, they're not gap and they're, and the companies can change what they tell you at any given time. 

Jeff Santoro: And that's something to be wary of. I think that's a yellow flag. If they always report this metric and then just stop, 

Jason Hall: right.

Especially if said metric has been deteriorating over prior quarters and now they say, Oh, well, that's not as important now. So we're going to tell you about this other thing. Always be leery of that. But the point is that you. It's not binary, just like the best lessons aren't learned in bull markets and the best lessons aren't always learned in bear markets.

The reality is that it's, it's, these are all things that can be incrementally valuable and you use them together. And you never just trust what management's telling you. You know, you, you want to verify it with the, there's what they say. And then there's what the business does and what the business does is always going to be in those quarterly and annual filings.

Jeff Santoro: [00:47:00] Yeah. 

Jason Hall: And some of the good stuff's going to be in the presentations. But also those presentations and the, and the press releases and the earnings calls can help you hold manageable accountable because that's what management says. This is what we expect the business is going to do. And then you can look back in six months or a year or the next quarter and say, well, Did you?

And if they did great or they did better, even greater, but if they didn't, then what, what did they follow up with? And you find out who you can trust. And you also find out if your thesis is right, right. Is the business actually doing what you thought it could do? Because you don't want to, like, I think sometimes like businesses don't deliver and then we just get mad at the management and maybe the reality is, you know what, I thought this would be a great business and you know what, it's a fine business.

The potential is just not as good as I thought it was. So maybe it's time for me to just start looking elsewhere instead of hoping to hire a new CEO, who's going to fix the broken business and maybe the business is just what it is. And we're the broken investor who keeps trying to make it. A great business in our heads.

Jeff Santoro: Yeah. And I think what's [00:48:00] interesting, and maybe this is a place we can wrap up this part of the conversation is that there are companies out there that give varying, all companies give varying degrees of detail in their earnings report. So there are some companies that. Literally do nothing other than release the SEC filing.

And the most famous example of that is Berkshire Hathaway. With the exception of the annual meeting and the letter he writes, you get no other They make 

Jason Hall: up for it once a year, right? Right. 

Jeff Santoro: But you don't get any, you don't get a press release. You don't get a, um No calls with analysts. And there's other companies that are like that.

Windmark is like that. Boston Omaha is like that. Much to the chagrin of me and you. But in a way

It forces you to start to do your own analysis to try to figure some things out. And I think that's actually sometimes a good thing because you can't be spun by by the spin because there is no spin to spin you. So the bottom line is, as, as we wrap up, you need to understand financials to, before you start, you know, before you make your, your next or your first stock pick, at least to a point where you [00:49:00] can know enough to be dangerous to use my earlier quote.

And over time, I think it's in your best interest to learn even more than that, if for no other reason to give you a pretty good BS filter for what management's going to throw at you. So Jason, just to kind of recap, The three things that we think all investors need to know before buying any stocks is you need to understand the market, need to understand yourself, and you need to understand financials, how businesses work, and that kind of thing.

Any final thoughts as we wrap up here? 

Jason Hall: You're, you're, you're, you're always going to be improving in all three of these things, right? That's, I think that's the most important thing to remember. You're going to be building on your knowledge. You're going to become more experienced. We've talked about before that the idea that people rise to the moment, especially I think when it comes to investing is absolute nonsense.

You fall to the level of your training and your knowledge and your experience. And that's certainly going to happen with the first and the third things, understand the markets and increasing your, your financial wherewithal. Over time. But also you're going to evolve as a [00:50:00] person too. And your understanding of yourself, even if you don't really change a lot, right?

You just kind of distill down to more and more of like who you really are. You understand yourself better. And here's the important one, Jeff, last thing I want to say, and I want to give you the last word on this is that you under, like you'll understand how you're like within, The framework of yourself and the framework that you build around your goals and your money and your finance and your wealth like how all of those things intersect so that you do become more effective allocating your wealth to reach your goals.

and become a better steward of your, of your family's finances. You just get better at that, right? You get better at understanding how all of those things intersect over time. Um, and it really, really pays off and, and you kick yourself because 10 years from now, you're going to look back and like, man, I was such an idiot.

And right now you're probably thinking there's your genius, And that's just the reality of it. So that's how I kind of think those three things, uh, 

Jeff Santoro: work together. What about you? Well, I, I totally agree with that, that these are all things that are not static and [00:51:00] it's ideal to know all three before you start.

But certainly if you don't, or if you know them to some degree, you'll learn more over time. My closing thought is that these three things, knowing the markets, knowing yourself, knowing them. The financials, if you're listening to this right now in May of 2024, you, these may not seem like totally vital to you, but I guarantee you, if you listen to this episode during the next bear market, or if this episode was out there in 2022, it would absolutely be feel more relevant.

And I think. My takeaway is that these are the, these are the things you should know at all times, but you will really happy, you know, them when we're going through a bear market, because everything will feel like the wrong decision. Everything will feel tougher. Go back and look at some of our episodes from 2022.

It's mostly my financial therapy on, on the air. So that's my takeaway that these are not only skills you're going to learn more about over time, like you said, but that these are really going to come in handy when the market is not going in a good direction. [00:52:00] Because 

Jason Hall: they're going to help 

Jeff Santoro: you avoid 

Jason Hall: the mistakes.

And like I said before, I, the older I get, the more time passes. I think that is the most important thing for investors is mistake avoidance. So I love that, Jeff. That's great. Great final thoughts there. All right. I think we, we did it, buddy. We did it. 

Jeff Santoro: We did it. 

Jason Hall: All right, friends, as always, we love sharing our thoughts, giving our answers to these hard questions about investing, stop stock picking, knowing how to read financials and understanding thyself.

But thyself needs to understand thyself and thyself can't borrow our ideas forever. You got to make these answers up. You got to figure out these answers for yourself. You are you and you can do it. You, Hey, you, I believe in you. Okay, Jeff, we'll see you next time, pal. 

Jeff Santoro: We'll see you next time. 

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