Investing Unscripted Podcast 89: Building a Successful Investing Framework

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Jason Hall: [00:01:00] Hey, everybody. Welcome back to Investing Unscripted, where we ask the hard questions about investing. I'm Jason Hall joined as basically always, but not always, almost always the voice of the people, Jeff Santoro. Hey, buddy. 

Jeff Santoro: I think you're always joined by me. I think you did one podcast in the past year and a half without me.

Jason Hall: But see, that's not always. That's-

Jeff Santoro: All right. Fair enough. Fair enough. 

Jason Hall: Directionally always. 

Jeff Santoro: Joined almost always. 

Jason Hall: Hey. How you been? How you doing? 

Jeff Santoro: I'm good. I'm feeling good. I'm excited about the conversation today. And we've got some fun stuff to talk about. 

Jason Hall: We do. We do. So again, thanks, just another thanks for all the great questions for the mailbag we did last week. As always, if you have more questions, don't wait for us to ask for them for a mailbag. Get them to us however you can. 

I'll introduce the episode, what we're going to talk about, and then Jeff's going to fill in a little bit. It's a little bit of a bit of housekeeping here for us. 

But first, this is more or less going to be a pretty evenly divided show. Our primary topic, this comes off of something we [00:02:00] did last year. We did an episode called how we invest (note: it was a four-part series. First episode here). And jeff and I've been talking a lot and our investing processes have evolved over time as they do for everybody. So we want to talk a little bit about building a successful framework. We're going to talk about our frameworks and how they've evolved over time. 

And then a little bit later in the show, we are going to talk about home ownership. Home ownership and investing, a topic that was suggested to us. A question that was asked by good friend of the show, Seena. So thanks to Seena for that.

Before we get into the meat and potatoes here, Jeff, or the vegan protein substitute and gluten free potatoes, which are always gluten free because they're not wheat. Jeff, what's the housekeeping? 

Jeff Santoro: That was quite the journey.

The housekeeping is what it normally is, just an encouragement for people to reach out to us with questions, feedback. On Twitter at investing pod email [email protected].

And also reminders that you should subscribe to our YouTube channel for video versions of these podcasts but also shorter videos about specific stocks that Jason and I do and that Jason does with some other folks as well.

And don't forget we have a newsletter that we would love for you to subscribe to. It gets you the transcript for each podcast. It gets you a Sunday morning newsletter from Jason and I, where we write about usually what happened on that week's show. Give some further thoughts. 

And the most important thing is to encourage listeners who are enjoying the show to please rate and review the show on the podcast apps. We got two more reviews since we last recorded. DanVal715 said, "I've been listening to these guys for a couple months and I've been pleased with the content. They are regular people who work regular jobs, but also have a great deal of knowledge about investing. I really enjoy the varied guests they have on, their response to listener questions, and the wide range of topics they cover. Definitely something I will continue listening to while I'm on my own investing journey." 

And we had a second one from Read-A, who said, "great podcast. I love it. I've loved Jason Hall from the early [00:04:00] Motley Fool days. Jeff is a great addition. I like the sparky repartee. And the fun they have with each other. It feels like family, only smart about investing. They have great guests too."

So I will not read every review, but I do want to encourage people to take a moment to write them. So well, I'll read some of them to thank the people who took the time to do it and to encourage others to do the same.

All right, Jason. Let's dive into it. So, as you mentioned, we wanted to build off of the how we invest series and talk a little bit more about frameworks for investing, making decisions about what to buy.

Where do you want to start? 

Jason Hall: A good starting point is. Let's, I think, let's just talk about individually, our own frameworks, how we invest, maybe just a couple of kind of the key tenets, maybe the tent poles, so to speak, of your framework. You want to go first?

Jeff Santoro: Yeah, and I'll be brief because I think I've talked about this enough that anyone who's listened regularly is probably familiar with it, but it's worth recapping for any new [00:05:00] listeners. 

So the first thing I do if I come across a business I'm interested in is I'll build out my spreadsheet. And this is just a template I have and it's got two parts. The top part covers what I consider to be just the normal financial results that you would want to look for in any, or at least most companies. It tracks revenue, revenue growth, gross margins, net income, cash flow.

And then I also have a second part of it where I do the same thing but with the KPIs or the key performance indicators for that specific company. So just as a quick example, if it's Apple, just a company everyone knows, I track things like the sales of all the different devices, iPhones, iPads, Macs, services, geographical growth in different parts of the world, you know. Whatever are the key things for that business that I think are worth keeping track of.

And those are [00:06:00] different for every business. They're going to be different for Apple than they are for Starbucks or whatever else. And then I just look at that over time, usually a three or four year span, just to get a sense of where- 

Jason Hall: Well, you want to see the trends, right? 

Jeff Santoro: Right. 

Jason Hall: You're not looking for one quarter to the next. 

Jeff Santoro: No. This is all about... so for me, and then my spreadsheet will make little charts automatically. Because that's really helpful, I think, to see trends and where things are heading. And especially if it's a cyclical company, you'll see the ebbs and flows, or if it's seasonal to you'll see the ebbs and flows of, oh, this quarter is always significantly higher than the other quarters or vice versa.

And yeah, as a starting point, I'm looking for trends. Where are things heading? Where were they? If something's treading in the heading in the wrong direction now, is it a blip? Is it a trend? Like I try to get a sense of that. 

And if I decide to buy that company, that's what, that's the bulk of what I do in terms of keeping track of it moving forward. I do read the 10 Q and the 10 K [00:07:00] and the earnings transcript, or I listen to the earnings call.

But a lot of it for me, and I'm curious if you think this is a good or bad way of doing it. I want to see the results. I want to see the proof in the pudding, so to speak. So that's why I think tracking these important financial metrics is a big part of my framework. And then I would say the last piece for me is as I add over time, I try, although I've been questioning this lately to buy more of the company at better valuation points.

Now, that doesn't always necessarily mean a lower price. Because the valuation metrics are based on more than just one factor, right? So sometimes just the result can go up really well, and the price can stay steady and it ends up being a better valuation. So.

Jason Hall: Yeah, I've got a really good example of that for my own investing over the past 11 years at this point with this one stock that I think will really illustrate that.

Jeff Santoro: So that's kind of it for me. Like seeing where the things [00:08:00] are heading, looking at the margins, looking at the company specific metrics, tracking them over time, looking for trends. 

And then I guess the last piece I would just add is what I then do over time with each quarter's results as I update this spreadsheet, is I start to ask myself questions. Or try to figure out the why behind what I'm seeing. 

So a very easy example, because this happens a lot. If a company is consistently profitable and then all of a sudden it's a net loss of $20 billion, that's too much, $20 million, there's usually a reason for that. It could be that they took a goodwill write down or they divested part of the business or there was a one time thing. But any deviation from what the trends have been is a really good way to prompt me to say, go look at why. Go try to find out why this trend deviated. And you'll answer a lot of questions that way. 

And I find that to be a really good way to not only get to know the company better, but to make [00:09:00] decisions about whether it's something I want to add to or not add to or sell or anything like that. So that's my process in a nutshell.

Jason Hall: So a couple of things I think are really interesting and valuable insights about the way that you invest in your framework that you've built, Jeff, that I think are really valuable. 

Number one, you've built a framework based on your personality, right? That you want to measure these things and you want to know, right? And that's really important. 

Frankly, there's a lot of that stuff with a lot of the businesses that I own. I don't care. I don't, you know, I care. But I don't care with granularity, right? So I don't need to do that. I like seeing the big picture and then same thing, you're going to learn a lot of times by the stock movement or seeing a big number change that there's something going on, then you can find out why.

So what I, the big thing is like, there's different ways, depending on who you are as an investor, that you can kind of accomplish the same thing. 

But the big takeaway for me is, one of the things you've talked about a lot is how [00:10:00] you're still newer on this journey as an individual stock picking investor. And this is the most incredible way for you to do two things. 

Number one is to learn about what you own, learn about the industries that these companies participate in, learn what numbers matter, and you build that knowledge base. And the other part of that, the second part is that that's what inoculates you against making bad decisions based on what the stock is doing, right?

You don't sell just because the stock is falling. You don't sell just because the stock went up a lot and you want to lock in your gains. You understand the business that you own, and then you evaluate it based on the performance of the business. And then you act accordingly with that. 

Jeff Santoro: And it totally is based on my personality. So I've tried at different times to take notes on an earnings call or jot down some thoughts about something I'm, you know, if I'm listening to the transcript of the call or something. And what I found was, I just won't do that [00:11:00] consistently. I just., I don't care. Like you said you don't care I'm that way with.

But if I don't do something written down, I will forget. So for me, the spreadsheet is like the proxy for taking notes on how the quarter went. Because it's all there, and it's very visual and then usually when I see it, I'll remember, oh, yeah, that's right. Net income dropped really big in this quarter because of a goodwill write down.

It's the note taking in form of spreadsheet for me triggers my brain to remember the what, the why was behind it. Not everyone is like that. I spend probably, the amount of time populating these spreadsheets that other people would think is unhealthy. But it's my way of remembering and keeping notes.

So I think everyone a lot of people like to journal. You I don't think write anything down and obviously, it works. So it's a completely different thing for each person. 

So all right, talk through your framework, Jason. Because I feel like even though we do it very differently in terms of what gets written down or not getting written down, I [00:12:00] think we do a lot of things similarly. 

Jason Hall: Yeah, I think you're right. So generally the way my process has evolved over time and this is the same way whether I'm looking for companies that can have really great growth potential, or companies that... I've talked about my style of investing in kind of higher yield dividend growth and also buying higher growth, maybe higher risk companies.

In both cases I'm looking for, I'm a tailwinds investor. I'm looking for large markets with clear tailwinds. A couple that come to mind is think about the semiconductor industry and thinking about how many more things are connected to the internet or are smart now? And this has been going on a lot longer than we've been talking about large language models and artificial intelligence, right? 

This has been going on for 20 years. It's a very big market. That's going to be approaching a trillion dollars in a few years. 

The aging of the baby boomer generation, the silver tsunami, right? That population is going to double from 2010 to 2030 to 80 million people, right? There's a [00:13:00] lot of companies that are going to be making a lot of money supporting older people. So there's another trend. So I look for those secular trends and then I try to find companies that are taking an outsize portion of that in some way. 

And my go to starting point metric for a lot of that, Jeff, is just revenue growth. Companies that are growing their revenue really fast, there's often, there's something there. And you're, if you look, and you're starting from the growth businesses, especially, like if you start with that metric, find the companies that are growing their revenue really quickly. And then from there, you can start looking for profitability.

Go ahead. 

Jeff Santoro: So let me ask a question about that, because revenue growth is always the first thing I look at too, probably just because it's at the top of my spreadsheet and it's at the top of the income statement.

But during 2021 everything you found showed revenue growth, almost. I'm exaggerating. And I feel like just looking through my portfolio over the past year, everything is showing [00:14:00] declining revenue growth.

And obviously. Those are just factors of each other, right? 

Jason Hall: And again, not revenue decline, declining revenue growth. 

Jeff Santoro: Yeah, I'm sorry. Slowing revenue growth. Right.

So I'm curious, what's the next thing you look at? Because that might be a good first step, but in a time of like a crazy bull market, it could be misleading. And in a time when we're correcting from one, it could also be misleading. 

Jason Hall: So again, as a starting point, the top of the filter is finding those large addressable markets. So you've done that first. And then you have to arrive at some conclusion about that market. Is this a market where companies can make money?

Automakers, for example, there's Tesla and then there's nobody else over the past 40 years, right? You, you've got to go back to like the Chrysler turnaround with Lee Iacocca in the late seventies and early eighties to find an automobile automaker stock, a U.S. based automaker stock that was really a good investment besides Tesla, right?

So you have to start like deleting the ones, it's like, yeah, the economic results just don't work out for investors. So you're, [00:15:00] again, you're gradually like kind of tilting things in your own favor, right? 

And then revenue growth, finding those high revenue growth, you tilt them a little bit more. And then from there, you start looking at, I generally go to the cashflow statement very, very quickly to try to figure out, okay, is this company generating cash? Is it still burning cash? And once I kind of figure that out, and it's like, okay, let's start looking at margins, right? And this can be very much affected by the business that it's in.

CrowdStrike, for example. The hyper successful cybersecurity company that's focused on endpoint protection. It's a software company, right? It's a cloud based recurring revenues, subscription, SaaS company. So they have enormous operating leverage, which means that their gross margins are very high. And then their conversion of that to operating margin is incredibly high too. It costs you a fixed amount for your base operating costs. And every dollar you [00:16:00] acquire, you know, above that amount is immensely profitable.

If you're manufacturing a good, you know, your costs are going to be, your fixed costs are going to be much higher. Your cost of goods, every item you make moves up much higher than it does if you're making software. 

So you have to kind of look at those differently depending on the industry that they're in. But you start finding those favorable economics and you figure out where the company is in that, where are they in their continuum, right? Are they still in that early stage growth period? 

CrowdStrike, for example, right before it went IPO was still burning cash. And then it started generating cash. And then it started absolutely gushing cash, right? So that's an example of a company that was very successful in doing that.

There's other companies that, CuriosityStream, for example. This is a company that hasn't. So they're not a software company. They're a content company, a streaming company. They didn't get to scale. Their growth slowed. [00:17:00] Their content costs are kind of what they are. The cost to acquire content is always going to be a challenge when you're in the entertainment business. And if you can't get to scale, you can't get that operating leverage, right? 

So figuring out where the companies are in that continuum is really, really important. And then you start thinking about balance sheet evaluation. 

Jeff Santoro: I'm glad you focus so much on margins. Because I think that's worth taking a second and pausing and focusing on for maybe some of the newer folks listening, newer investors listening. Because you can be tricked by looking at the dollar amounts for things like gross profit, operating profit. And even net income to some degree. 

Jason Hall: And those numbers matter if you're the CFO and you're paying the bills. You want the biggest gross margin dollars you can, because that's what pays your operating expense and pays your debt expense, right? But if you are trying to maximize the return of the business, the margin numbers matter.[00:18:00] 

Jeff Santoro: And what I've found helpful is to look at the difference between gross margin and operating margin. As like a, as a quick way to see how efficient the business runs. This is not perfect. This is just like a ballpark because like to your point- 

Jason Hall: Let me define those real quick. 

Jeff Santoro: Go ahead.

Jason Hall: So gross margin, this is the dollars that you realize when you sell a product minus your cost of goods sold. So cost of goods sold is, if you make a widget, it's the cost to operate the factory. The cost for the raw materials that you use . It's your distribution costs that are directly tied to selling that product. 

Okay, so that's your gross margin. That does not include the cost to run your front office, your sales staff, your marketing, your research and development, all of what they call SG& A. Those are operating expenses.

So cost of goods sold is what costs to make the good and get it to market.[00:19:00] And everything else is an operating expense, and then you've got your interest expense and all that kind of stuff that's part of it too. 

So operating margin is your gross margin dollars minus operating expense. It's what's left over. Basically it's everything that's left over before you spend capital, make capital expenditures. Acquiring new equipment, all of that sort of thing. 

Jeff Santoro: Yes. And the another way I think of it, which has helped me and my tiny brain think about it, is I like to think of everything as a percentage of a dollar.

Like all those margins I think of as a percentage of $1. So for example, if you made $1 as a business and your gross margin is 87%. You now have 87 cents left. And then if your operating margin is 50%, you now have 50 cents of that dollar left. And if your net income margin is 6%, you've kept 6% of that dollar.

So, like, that's how I think of it. It's gross first, then operating, and then you have all the taxes and, and other incomes, and [00:20:00] then you get to your bottom line net, net number. That quick difference between gross margin and operating margin is a quick proxy for, like, how efficient, in my mind, the business runs.

 To use the software example, if your gross margins are 87 percent and your operating margins are 12%, you are spending an incredible amount of money on operating expenses. And I like to think of it all as a percentage of a dollar just to kind of keep it straight in my head. 

 So one other thing that I forgot to mention on my, in my process, one other thing that I keep on my spreadsheet and it's related to operating margin in a way, is I have a whole section where I put the, all of the operating expenses and then list them as a percentage of revenue. And that's another way that I like to think of how efficiently- 

Jason Hall: Each individual item. 

Jeff Santoro: Correct. So you can see here, yeah, and then total. And then total.

But what I like about that is, so let's say the sales and marketing percentage, the sales and marketing expense as a percentage [00:21:00] of revenue is increasing while revenue is decreasing. And also let's just say user growth is declining. 

That's a big red flag to me, because here's a company spending an incredible amount of money, an increasingly large amount of money, on sales and marketing, which should theoretically be bringing customers in and upselling them on products and all that kind of stuff. But it's not working. Because revenue growth is slowing or declining, and user growth is slowing or declining. 

So I know it's similar to thinking about operating margin. But I just like to frame it that way in my brain as a percentage of revenue on my spreadsheet. Just helps me kind of wrap my head around it.

So again, to each his own. 

Jason Hall: Well, I think that's useful to like for a granularity perspective. You can start looking for yellow flags and red flags with the business things that are ineffective that can give you an indication of whether or not management's being effective with how they're running the business.

I think it's great. If and sometimes, you know, if I have a problem child [00:22:00] in my portfolio, I might do some of the same thing. 

I want to talk a little bit more about one of the things that you and I both do that I know for you is something that you're starting to question. And that's thinking about how you buy and when you buy and trying to buy at better valuations over time. 

And how do you define valuation is what you're paying versus what you're getting in terms of something like earnings, free cash flow, that sort of thing. So generally it's price to earnings, you know, basically what it means is how many years is it going to take for the company to generate what you paid in earnings? So 10 times price to earnings means that it's going to take the company 10 years to generate as much earnings dollars. As you paid to buy shares, right? So lower is better with most of these metrics. 

And I tend to focus on operative cashflow and free cashflow for the most part. Not always. I'll use book value for some [00:23:00] companies. You start getting into insurance and banking and stuff and book value can be useful. 

Sometimes I'll even use yield as a proxy. If it's a really, really solid, strong business, and I know the dividend is safe, then I'll use yield. 

But I want to give an example of how, because I think this is a good segue to how you're kind of re evaluating your thoughts on this. Because I think this might be one of my favorite debates that we've had in a while.

So I'm going to use Trex as an example, and I'm going to go back to July 9th, 2013. Jeff, this is when I opened my position in Trex. Made my first investment in Trex, and I paid about 17 times operating cash flows when I bought. And I bought again, 2017. Early 2017 I paid 14 times operating cash flows. 

I bought again in, 2022. December, so a little over a year ago now. 13 and a half times. So a little higher multiple than I paid, excuse me, a [00:24:00] little bit lower multiple than I paid before. 

Now here's the thing. 2013 I paid, this is split adjusted. I paid less than $6 a share, 2013. 2017, I paid about $14 and a half dollars a share. And in 2022, I paid $47 a share.

This is one of the things I think is kind of a bone of contention for you, or a sticking point with this idea of buying at better valuations. You can buy at better valuations, but still end up missing out on multibagger gains price appreciation, right? 

Jeff Santoro: Yeah, and I don't know that I'm, I've always been a buy a better valuation person ever since I started. It's just always the way I've thought about it. And I still lean maybe towards that.

But we talked about this last week, I do wonder if maybe there isn't a better way to do it, assuming that you are making an initial purchase at a reasonable price. Because I, you know, I'll give you an example, ASML. Today, we're recording on the [00:25:00] 24th of January went up, I don't know. Last time I looked, it was high single digits percent because they reported earnings this morning and they were good. And I think it might even have hit an all time higher 52 week high today. 

And I went back and looked and the last time I bought it was when it was pretty low compared to now, like when it was at its previous low several months ago. And it wasn't the first time I had bought it. I had bought it later, but I knew at the time it was cheap for ASML. Historically, it was below it's, all of its averages for all the different metrics I was looking at. So of course, because you know, whenever something goes up, you question whether you should have bought more of it.

This is an obvious and normal thing for everyone to feel. 

Jason Hall: FOMO is real. 

Jeff Santoro: I said to myself, well, maybe I should have just bought, you know, a third of what I consider to be a full position in my head back then. And then a month later, then a month later, and I would have had all these gains all the time. [00:26:00] Because now I'm watching ASML rise on my brokerage account when I sort it by returns and feeling like it's getting more and more expensive. And I'm not going to add to it right now.

Now a year from now might be a different story and I'll add to it then. I don't know. I think it has a lot to do with you're just, individual investor comfort level, and risk tolerance, and all that kind of stuff. 

I like the idea of paying better valuations. I mean, who doesn't like getting a deal? But if those better valuations happen seven years apart and the stock goes up 600 percent over that time, you could argue that that was not the right, the right decision. 

Jason Hall: I think this ties a little bit into the conversation we had at the end of our mailbag talking about the, only dips only buy dips, to crib David Gardner. And I think it's one of those things where this very much depends on what you're trying to buy, you know.

Trex, for example, when I first opened my position, was a much smaller company than it was, than it is now, and was [00:27:00] still just emerging from some serious litigation problems, class action lawsuits, and like quality issues that they finally, Ron Kaplan had really turned the business around. They were really starting to get their legs under them. I

also, I mean, it was 11 years ago, I didn't have anywhere near as much investing capital as I have now, right? So there's the limited resources factor as well that we, as individual investors, we have limited capital to work with. We're not running a fund, right? Where we've got a couple million dollars of dry powder laying around of OPM, other people's money that we can, that we can invest. So that's just a reality.

The other part of it too, for me, is that I think about it not just buying at a better valuation over time, but building out a position based on the company earning my money too, right? Are they, are they doing what, are they fulfilling their promise? Are they delivering well? Is the operating leverage, like Trex, for example, their margins are much higher now, than they were back then. They've made some missteps along the [00:28:00] way, but they've taken a ton of market share. 

And did I miss those multi bagger returns? Yeah. But I invested capital in other companies along the way too. So it's just the reality of being an individual investor too. I think we have to remember. 

Jeff Santoro: Yeah. So not to rehash the whole conversation and maybe we can move on to the next question that I want to ask you about your framework, but just one thing that I'm thinking, cause you said it depends on the business and I totally agree.

And I'll just go back to, I'll give two examples. One is ASML, which I already mentioned. It's probably a company I have maybe the highest conviction in, in my portfolio. So hindsight being 20/20, maybe that is one I should have backed the truck up a little bit more aggressively on when I, when I really knew it was in my mind, inexpensive comparatively.

But on the other hand, a company like Lemonade, which we were just talking about before we hit record, I'm still in wait and see mode with that company. So I think I'm smart in that sense to maybe [00:29:00] wait. I mean, the valuation is obviously better now because it's fallen a lot since I initially bought it, but so maybe it's not the perfect example. But a company that you're still sort of waiting on to see.

Jason Hall: I mean, the valuation may be better, but that's because it's just a slightly less worse performing business. 

Jeff Santoro: Exactly. 

Jason Hall: Their balance sheet has deteriorated. So you got to factor all of those things in. 

Jeff Santoro: Yeah. So like with all things, it depends, which is a super satisfying answer.

All right. So before we wrap up the first half of the show and move to the second topic after our break, I do want to ask you: what has changed in your framework over time, or what do you think would be like a benefit of beneficial change that you haven't implemented? 

Is there anything about it you say to yourself, you know, I should do more of this, but I don't. Just curious what, how it's changed, and how it might change moving forward. 

Jason Hall: Well, I've certainly become far, I don't want to say risk averse. But I've just, I've reached a point because I've had a pretty successful 14, 13, 14 year run here. 15 years. No, goodness gracious. [00:30:00] 2007, 2008 since I really flipped the switch here. So what does that work out to 16 years? 15, 16 years. Long enough and going through some prime earning years with myself and my wife and really aggressively contributing to investing accounts and, oh, by the way, it being the best period to be investing in growth stocks in my lifetime over that period.

My wife and I have been really fortunate. We've built, a pretty nice amount of nest egg, so I don't have to take on as much risk, right? So at this point, I've started transitioning to more proven, income generating companies as the foundation of my portfolio. 

I certainly don't avoid, you know, those, you know, those potential home run stocks. So we've talked about QuantumScape, made a bunch of videos about it. I own some QuantumScape.

You know, this is a, you know, three years ago, this company was a laboratory experiment and they've made a tremendous amount of progress, but could still be an utter failure.[00:31:00] And I own the company and I'm going to eventually add to my position. But I'm willing to take those risks. 

But I've reached the point where those risks will not impact my future financial goals, and I'm just kind of stepping back a little bit from taking on, those risky opportunities. But I think it's just a normal evolution of stage of life and focus on things that matter.

For example, we're starting to focus a little more on helping make sure my kid is able to make a good start in life, of investing for his education, that sort of thing. And able to back off a little bit on investing for retirement, that sort of thing. So, again, just kind of a normal evolution, I think.

What about you? 

Jeff Santoro: Yeah, I mean, to me, well, one of the things I already just talked about, which is the whole waiting for better valuation points versus just kind of being a little bit more aggressive about a company that you're confident about. 

I think for me, I mentioned how my framework is and my process goes, which is build the spreadsheet, look at all the things I want to look at. And then ultimately, you know, we didn't really get to the next point, which is make a [00:32:00] decision about buying or not. And there's a couple lessons I've learned about when to click the buy button and when not to. 

So my process hasn't really changed in terms of what I do to get up to speed on a company. But I do ask myself, I'm much more patient and picky about the companies I open a position in. Because I've wanted to have less, and I can't have less if I just keep, you know, buying because I'm interested.

So two things that I've kind of evolved on myself is I've tried to not get as caught up in the story of a stock. And tied to that a little bit is I've tried to ask myself more about the total addressable market opportunity and the secular tailwinds, kind of like you said, as a starting point for you of, is this a company that's a leader in a space that's going to keep growing?

Jason Hall: Yeah. Right. 

Jeff Santoro: It's like cybersecurity that ain't going anywhere. So that would be, but then the question is, is this cybersecurity company going to be the winner, one of the big winners, one of the top [00:33:00] five, does it matter because it's growing so quick? Like those kinds of questions are more on my mind. And it's made me wait on a lot of things on my watch list.

And then, tried to be a lot more discerning about buying the large mega cap companies. Like for example, back when we were at the depths of the 2022 bear market, Google (Alphabet) looked really, really cheap to me. And in retrospect it kind of was, looking at how it's done since. 

I don't need to own more Google. 

Jason Hall: You were buying it every pay period. 

Jeff Santoro: 80 to 90 percent of my portfolio, my combined investment account with my wife is in index funds, I probably own more Google than I know.

So, and that's particular to me cause I have such a large, such large exposure to index funds and mutual funds and things like that. So I've tried to really be more careful about putting my stock, individual stock money into my portfolio. 

Jason Hall: Yeah, I think, I think I can, I can be too valuation focused at times.

 [00:34:00] Because again, I think it's really important with those mature, big predictable, proven companies, making sure you don't overpay is really, really, really important. Because that's when you're going to underperform with those companies is when you overpay. 

When you're buying those higher growth companies with massive addressable markets that are still early in their phase. You might not do as well overpaying, but generally when you lose, it's just because the company's under, they don't execute, right? They don't do the thing that they're trying to do, not because you paid too much for the stock. 

Now there's exceptions to that. October, 2022. October 2022, that was a peak bubbly period. Just like we saw back in the late nineties and through, you know, early 2000. That was a period where even some really, really good companies would take a long, long time just to get back to break even.

But by and large, that's not the way the market works. These companies, if they do what they're going to do, it's going to work out fine.

The more you become concentrated on proven businesses, the more valuation matters, sometimes [00:35:00] I conflate the two a little bit. And I over hedge on valuation for companies that it's really just about execution. 

Jeff Santoro: So not to, I don't mean this to denigrate you in any way. This is an honest observation. I wonder if for you- 

Jason Hall: the best part is if you're still denigrating me and you mean it that way. That'll be perfect. 

Jeff Santoro: I, we both have talked about this. We both at times got caught up in the 2021 excitement and both overpaid for stocks. So I wonder, cause I think a lot more about valuation than I used to as well.

And I wonder if for both of us, it's more, it's overcorrection. 

Jason Hall: Swinging the pendulum too far the other way. 

Jeff Santoro: Yeah. 

Jason Hall: No, that's fair. That is absolutely fair. There's no doubt about it. And in hindsight, I should have been, you know, using those, you know, the credit card companies, they send you the checks. I should have been writing some of those checks and putting that money in my investing accounts back in January of 2023.

We all know that in hindsight, right? 

Jeff Santoro: Yeah. All right. So let's take a quick break. And then when we come back, we'll have [00:36:00] what I think is going to be a really interesting conversation about home ownership or lack thereof and investing.

We'll be right back.

Jason Hall: Hey, Jeff. 

Jeff Santoro: Welcome back from that fantastic break. 

Jason Hall: Yeah. You make the best coffee. Thank you. 

Jeff Santoro: Oh God. The coffee jokes are back. Please write in at [email protected] and share your thoughts on Jason's coffee break puns. 

Okay. So our good friend, Seena reached out to us to point out slash ask a question about how you think about investing could be different whether or not you are a homeowner.

So not to give too much away about Seena, but he rents and we have houses. 

Jason Hall: So he lives in a, lives in a very big city in a very big, expensive market where renting is what the vast majority of people do. 

Jeff Santoro: And I was happy he asked us this question, because it was obviously something he was wondering about, but also because we probably wouldn't- 

Jason Hall: Because you could refer to me as the landed gentry, was that really?

Jeff Santoro: Yes. I like using the term landed gentry, which is a Seena [00:37:00] term. 

No, but I do think we, we probably need to more often check our own perspectives and biases. Like, we come at this from two middle aged dudes who have families and homes and jobs and, you know, and that's not everyone's situation. So this is a good opportunity for us to think differently. Not from our own experiences because neither of us are renters at the moment. I have been, and I'm assuming you have at some point in your past. 

Jason Hall: Yeah. 

Jeff Santoro: So let's dive into it. How do you think about the way homeownership impacts how you think about investing? 

Jason Hall: So I think as a starting point, more people should just be honest about how they think about their house and then the reality of their house as an investment. I have some very firm opinions, Jeff, about the question, is a house an investment?

Jeff Santoro: Would you like to share them with us?

Well, no, I'm, all kidding aside, I've come around in thinking about this differently because I, and we talked about this and we were planning the show. I don't know what your upbringing was like. It was, [00:38:00] if not overtly, it was definitely subconsciously pounded into my head as a younger person that you buy a house because it's an investment.

You buy a house because it's an investment. As soon as you can afford to do that and not pay rent, you should. And looking back at my own experience, I bought my first house, a condo, when I was 23. And only by the grace of God and the way the mortgages were back then, did I skate through that whole period of my life where I bought three houses in five years, without massive financial ruin.

It was by the grace of God, good luck, and borrowing money from family that was willing to lend it. Otherwise, I could have been completely either stuck in a home, underwater on a mortgage, in a school district I didn't want to be in, whatever it was, I was absolutely blessed and lucky. 

And, so of course I look back on that, and I don't know that that was the best advice. But of [00:39:00] course, I think just generationally, that's how our parents generation viewed it, because for them it was, right? So yeah. 

But I do think it, it depends. 

Jason Hall: So I think It's really important to, I think people chase this idea of a house as an investment in the same way that people chase the idea that the stock market's rigged, right? And the reality is buying a house, buying a, owning a home is a massive, massive liability, right? It is a huge liability.

You have a six figure thing and increasingly for more and more people, a seven figure thing that you're responsible for, right? You are responsible for it. You have liability if people are on your property and get hurt. I mean, they're all of those realities that come into play. 

And frankly, a lot of people are woefully unprepared for that, right? Financially unprepared for that. Stage of life, unprepared for that. Your example, [00:40:00] Jeff, you know, buying a house in the early mid 2000s, a condo. My wife and I, we bought a house in the kind of mid 2000s too, and life situations change in very unexpected ways, and our life situation changed, and we had to leave where we were, right when the market was completely freezing up.

We ended up, the house ended up being foreclosed on. We chose to walk away from it because of the life scenario that made that investment a terrible investment and a massive, massive loss.

So I think the better way for people to think about it is that it is an asset, right? It's certainly an asset, right. And it's an appreciating asset over the long term.

Jeff Santoro: Usually.

Jason Hall: Usually. Again over the long term. Again, over the long term, Right? So that's a key part of it. 

It's just like stocks. The longer you own it, the higher the probability that it's going to create wealth for you. Now, the difference with a home is you own a home [00:41:00] as a place to live, a place to raise your kids, a place to keep your stuff, right? A place to cook your own meals, all of those things come into play. 

It is not an asset that you own specifically to generate income or wealth for you. That's a, that's a benefit of it. That's a side benefit is that it grows in value. If you read the, in the beginning of, One Up on Wall Street by Peter Lynch, one of the things that he talked about was he thinks that before people begin investing, they should own a home , right. 

And there's a little bit of his bias was kind of built into that, right? This is a very wealthy man when he wrote the book and maybe a little bit blind to the reality for a lot of people. And the market was different back then, too. Access to the market was different in the eighties, late eighties when he wrote the book.

 But again, the idea is thinking about it as an, as it is a kind of enforced long-term savings vehicle. Right? Not an investment, right? Because then that tempts people into speculating into buying things that they don't need to buy for reasons that they don't need to [00:42:00] buy them. Right? 

Jeff Santoro: So, yeah, and you know that what I was guilty of. 23 year old me was guilty of. I bought that condo. Two years later, I was able to sell it for a $40,000 profit. And then I bought a townhouse. And within three years of living there, we were, it was worth less than what I bought it for.

Because as lucky as I was to time the market when I sold the condo, I was unlucky when I was ready to move out of the townhouse into the house we live in now.

So one thing that I think has helped me even through all that luck, if I'm being honest, could have been bad, is the fact that I've never, even though I was told like your house is an investment, I never thought of it as an investment in the way that I think of a stock portfolio or an index fund or a retirement account. You know, I think maybe because I was just 40 years away from the possibility of retirement and 30 years away from paying [00:43:00] off the house if I had a, you know, from the mortgage I had at the time. It just was never in my mind that, oh, at some point I will use the equity in this house to secure my future. Like I've never thought of a home that way, which I think is probably a good way to think about it.

I know some people, some people do though. I know people who don't have as much in savings or an investment accounts because they're thinking. Well, when I retire, I'll sell my house and I'll downsize and I'll have whatever, six, seven, $800, 000 in the bank because my house will be worth that much more and I'll buy a tiny thing and. Maybe, but like, like to your point, you never know. So, it's such a huge thing to gamble on in terms of banking on it for your future. 

Jason Hall: Well and here's the part of it too, that I think people like, they brag about the money they made when they sold the house in the same way they brag about the money they made in Vegas on that weekend trip. 

They don't talk about the losses, the other money. They didn't talk about how much it cost to get there, how much they spend at the bar, the restaurant. And with a house, it's the same way. Okay, how much did you spend to [00:44:00] renovate the kitchen? How much did you spend on insurance and property taxes? All of those other things that you're not factoring in when you're talking about this gain you made on the sale of the price, right?

So that's all of those realities that come into play. 

Jeff Santoro: Even when I, you know. So my quick story about selling the condo for $40,000 more two years later, that's the dollar amount over what was left on my mortgage. It does not count what I paid towards the mortgage over those two years. It does not count the new carpet I put in or the stove I bought, you know, like all the... and I didn't calculate that. So I don't know exactly what.

Jason Hall: Of course, of course.

Jeff Santoro: It wasn't really profit, you know, like if I'm being an accountant about it. 

Jason Hall: But, and the, I mean, the other side of that argument too, Jeff is what you got to live somewhere, right? So you were going to pay rent to somebody if you weren't paying your mortgage and all of those other expenses.

So I get it. It's found money in a way. But it's guaranteed, it is absolutely guaranteed that if you buy a house versus renting and you have your [00:45:00] same mortgage payment and insurance versus what your rent would be, you're going to pay a lot more. 

You're going to, it is the reality. You own it. You're going to improve it. Your spouse is going to want to improve it. Your kids are going to break windows that you have to replace. The windows are going to be old and your energy bill is more. So you replace the windows, right? It's just the reality of home ownership.

You ready to move on to our next question here?

Jeff Santoro: All right. So then I guess the next logical question we've talked about whether or not a house is really an investment or not. The next question is, should you buy or rent? 

Jason Hall: So I think using, we'll use our friend Seena as an example, and you talked about a little bit before the first one, is a lot of times this decision is kind of made by the realities of life. Where I live, where you live, homeownerships a little bit more accessible. Want to live in a major metropolitan area, it's going to be harder.

Especially if you're younger and just getting started and you're not already bringing that home equity with you. It's going to be harder to get into the housing market. And there's other [00:46:00] factors that come into play too. 

Morgan Housel wrote a lot about this over the years when he was a columnist for the Motley Fool. And that one of the most important factors about buying a house is, can you reasonably predict staying in the same place for five plus years, you know, because the changes in the market can happen at very inopportune moments, and put you in a situation where you're stuck. You can't leave, you know, because you have a house that you can't sell. Or you can't afford to sell it because you can't be, you wouldn't be able to afford to buy a replacement wherever you want to go. Right? So all of those things kind of come into play. 

What do you think? 

Jeff Santoro: It depends. I mean, so living in New Jersey, where, even where I am, you're really only an hour train ride from getting into the city. There are people who live in my neighborhood who commute to New York City every single day for work. And I know I have friends who live a lot closer to the city who commute into the city and they live closer because they don't want as long of a commute.[00:47:00] 

I know people who live in the city and In this area of the country, that's a normal thing. If you live in New Jersey, you know people who live in the suburbs, you know who people who live in the city, you know who people who live in like the rural parts of the state. Yes, there are more rural parts of New Jersey.

Jason Hall: The Garden State, babe. 

Jeff Santoro: And I think everyone, especially the people who work in the city and are deciding where to live, have to make that calculation. I know people who would never trade the vibe of being in New York City for anything and just, they just say, I'm going to rent forever unless I make a lot, a lot of money.

And then I know people who say, you know what, I want to buy a house in the suburbs because I want to be in this school district or I want my kids to live in a different kind of neighborhood or whatever, and I'll do the commute. So that's just like my New Jersey specific view on it. 

But I think what you just said about tying yourself down. Is something I didn't think about when I was younger, which is the time you want to be a little less tied down because I guess because I was a teacher and I'm certified to teach in New Jersey. So [00:48:00] to me, it was like the idea of moving to another state, at least for my career was just I didn't even have to think about it. Like, it's not not a real thing. 

Jason Hall: And the other states sighed with relief. 

Jeff Santoro: Exactly. We're stuck in Jersey, but I mean, that's just one one profession, almost any other profession you can do anywhere. Right? So, I think it has a lot to do with, again, the lifestyle you want, what part of the country you live in, how tied down you want to be, what profession you live in. 

But I have changed my view on the whole, you, as soon as you can, you should buy a house versus not. Because it's not always the best financial decision. It's not always the investment quote unquote that some people think it is. 

Jason Hall: Yeah. And another part of it too, is that it can have vastly different impacts on the way that you think about investing and think about personal finance. 

Jeff Santoro: Yeah. Let's go there next. Because I think that's the heart of the question is how does Being a homeowner or a renter changed the way you think about your investing.

Jason Hall: So I think as a starting point, like there's, you think about it over the [00:49:00] long term, one of the big upsides to me for owning a home is that you're able to fix and at some point eliminate a substantial part of your future housing costs, right?

You have a fixed rate mortgage. That's not going to change. That's staying what it is. You don't have to worry about your rent going up 5, 10, 20 percent a year. I know a lot of these very dense urban markets, they have, you know, rent controls in place to help limit that. But that's a pretty big future expense that you can lock in and keep low and ideally pay it off by the time you reach retirement.

And that's a massive amount less money that you're going to have to spend every year to pay for that. Obviously property taxes and liability insurance and those sorts of things, maintenance costs are going to continue. 

So the flip side is, I think your family balance sheet, you need to have more cash if you own a home, right? What happens if your roof springs a leak, you know? Insurance company is not going to cover that unless a tree falls on it. And it's hard to [00:50:00] fake that. So, um, I've tried. 

It's, you need, again, you're going to spend money. You need new windows. You want to upgrade your windows. A kid breaks a window and your wife says, okay, you know what? I've been wanting new windows anyway. So that. Turns into $9, 000 that you have to spend. So we all have a finite amount of disposable income. It's got that money's got to come from somewhere. 

Jeff Santoro: Speak for yourself.

Jason Hall: So as a homeowner, you have to have a bigger nest egg.

Jeff Santoro: Well, yeah, that that's an interesting, 

Jason Hall: I just caught what you said. 

Jeff Santoro: That is an interesting thing. I didn't really think about that aspect of it where you could theoretically have maybe a little less cash cushion if you're a renter. Because there are, if not none, there are far less unexpected expenses. 

I think the thing you'd want to have planned out, though, is rent increases. Like, that's the trade off. Like, if you're thinking about how much to invest, how much to save, you probably are, and this is me speculating, I'm not a renter, so anyone who's a renter wants to tell me I'm wrong, I would [00:51:00] imagine part of your financial planning is, you know what, I'm going to make sure that next year we can afford an X percent rent increase because that's what I anticipate it will be. And then in that year you have to make sure that the next year. 

Now, hopefully, theoretically, your income increases over time. So maybe those two things keep up with each other. I don't know. But that is a really interesting point. Like how the amount of cash you keep, which is tied to how much then you can invest. I think that's an interesting difference between the two. 

Jason Hall: On the flip side of that too, is that you not only is it, you know, you build out that emergency fund over time, right?

If you're renting, you can immediately begin contributing more to investing accounts, or retirement, or going more vacations, like whatever you want to do, all things created equally, you just, you don't have the same responsibilities and liabilities. And you can have more fun with your money, or you can use it to make sure that when you do reach retirement, you've created greater wealth.

Jeff Santoro: All right. So to wrap things up here, one more question, what do you [00:52:00] think are some major differences? Both long term and short term, that can be easy for people to not consider?

Jason Hall: I don't remember what we were talking about. 

Jeff Santoro: I don't even know what that question means. I just figured if I read it, you would.

Jason Hall: So I think we've already talked about it a little bit, but it's a good chance to kind of summarize it. So if, if you're somebody that's kind of going through that decision, maybe you're trying to decide, maybe you're, we'll use Seena as an example, our good friend. Again, he's, this is somebody that's lived in a lot of different places. Worked on horse ranches in the Midwest. Has lived in some big cities. 

At some point you're trying to make a decision about the lifestyle that you want. And if you come to rest on one or the other, it's really easy to miss out on those important things. Like if you decide you want to buy, well, you know what? I need to start saving more money because I don't want to have to whip out the credit card to pay for a big expense, right? An unexpected unplanned expense. 

[00:53:00] If you end up going the route of renting, thinking even longer term, which I think this is the thing that most people screw up on is really thinking longer term to make sure that you're going to have access to income to pay for housing when you're no longer able to work or you no longer want to work. If you're going to, if you're going to rent and you're not building equity in a house, you're getting to the point where you have that reduced cost or that fixed cost, making sure you have the income source to pay for housing down the road.

It's so easy to miss those things and you need to. I bet somebody's got a checklist online to help you go through the things that you need to think through that you won't miss to make sure you don't miss those important financial factors for buying versus renting. 

Jeff Santoro: Yeah. I was just going to say, if you Google things like, should I buy, should I rent buying versus renting?

You will find a lot of resources. I know again, we, it feels like every week we do a reference to Robert Brokamp from the Motley Fool, but I've heard him talk about this topic several times on some of the Motley [00:54:00] Fool podcasts, renting versus owning.

I guess the way I would wrap up the conversation is, to me, it's about whether you live alone, or whether you live with other people, spouse, kids, whatever, I think you do need to have a conversation with yourself or with your significant other about all the things we talked about in terms of first, the lifestyle you want. Second, the trade offs you make to have that lifestyle. 

And then you got to kind of run the numbers and decide. Okay. What do I anticipate renting is going to cost. What do I anticipate homeownership is going to cost. Do I want these risks or these assets of doing one versus the other? This will allow me to save this much. This will allow me to save that much. 

And then weigh that against what you'd like, right? Because you might love the idea of living in a city, but when you run the numbers and think about all the factors in your own life, no, maybe we should go to the burbs and buy a house or vice versa.

You don't want to live in the burbs and it and or maybe it does make financial sense. It doesn't make financial sense. And you do it anyway, because it's that much important to you, you know. 

So like, yeah, I [00:55:00] think it's all those things you have to sort of weigh. Just like for us, when we made the decision to initially buy our first houses when we were younger, I know for me, I was doing all the calculations about how much is the mortgage going to be? Can I afford that? What happens in the summer when I stop getting a paycheck? Because I'm a teacher. And then thinking through, okay, how much do I need to keep aside? What does my emergency fund need to look like?

You know, I looked at my condo and I said, okay, the water heater is kind of old. I'm on the bottom floor. I don't have to worry about the roof. There's a homeowners association. So there's like certain things you have to sort of game out. 

I think my bottom line summary though, is it shouldn't, in my mind, impact how you invest, in terms of saving for your future. I just think it might impact how much you can invest and how much you need to keep in cash. Like that's kind of where I land after the conversation. 

Jason Hall: I think that's I think that's a pretty good way to think about it. I think this is a really good example of the analogy [00:56:00] of decisions as being doorways. It's rare that somebody rented and that turned out to be a big mistake. 

Chances are they were young and they signed a rent on something really fancy that they just couldn't afford, and they got evicted, right? I mean, that, that happens. The horror stories are the people that bought houses they couldn't afford and got foreclosed, right? An eviction, you figure it, you work through that. A foreclosure, it's the better part of a decade, right? And massive financial implications. 

Jeff Santoro: Or not even eviction. I mean, maybe you just, you just eat ramen noodles till your lease is up and then you go find a less expensive place. You know, there's. 

Jason Hall: But, but getting back to the doorway analogy, like a rent, renting is like the doorway that's easy to go back through, right? You walk through that decision you make and it's easy to unmake that decision.

Buying a house, that's a hard decision and an expensive decision to unmake. So I think when it comes like to the lifestyle stuff, Jeff, I think most people, rent a house. Go rent a house, rent a house that you're responsible for the lawn maintenance [00:57:00] and clean, washing the windows and all that stuff. And in the area that you think you want to live. Again, an easy decision to unmake. And then you buy after that, right?

So I think that's just a good way to think about it too. All right, Jeff, I think we did it. 

Jeff Santoro: We did it. 

Jason Hall: Words about things spoken from our mouths.

Okay, as always, just a reminder, we love to give our answers to these hard investing questions, hard questions about personal finance and owning homes and being the landed gentry or the unlanded un gentry, however you may want to describe us.

But it's up to you. It's up to you, dear listeners, to answer those questions for yourself. You can do it. I believe in you. 

Jeff, we'll see you next time, pal. 

Jeff Santoro: See you next time. 

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