Investing Unscripted Podcast 92: Narrative Versus Numbers In Investing

Separating bias from intuition.

Investing Unscripted Podcast 92: Narrative Versus Numbers In Investing

Note: Transcripts are edited for clarity. Some better than others. We may earn commissions from some (not all) links. Thanks for the scratch.

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Jason Hall: Hey friends, welcome back to Investing Unscripted where we ask and answer the hard questions about [00:01:00] investing. I'm Jason Hall, he is Jeff Santoro, he is the voice of the people, I am the aristocracy. Hey Jeff. 

Jeff Santoro: The voice of the aristocracy, let's get it right. 

Jason Hall: There you, okay, fair enough, yeah that's true, nobody's touched my shoulders and dubbed me anything.

I've been called names, but I've never been dubbed. 

Jeff Santoro: Lots of names, mostly by me. 

Jason Hall: True, and they're pretty accurate too. All right, what's going on? 

Jeff Santoro: I'm ready for spring.

Baseball spring training has started. It's a beautiful sunny day here. I've had enough of winter. I'm ready to move on. 

Jason Hall: Pitchers and catchers have reported. That's true. Yeah, up where I am we've definitely still got some winter ahead of us. But you know what, Jeff? The people didn't show up to hear us talk about... Man, we just sounded like a couple of dads.

Jeff Santoro: There is nothing more cliche than having a conversation about the weather. 

Jason Hall: Yeah. Yeah. You had some other exciting things happen in your life. I'll let you share it another time. Let's get going. We got a great episode planned, and this is one that I've been looking forward to. And I want to just give a hat tip to Tyler Crowe, our friend and colleague for inspiring the idea.

And we're calling this [00:02:00] episode Narrative Versus Numbers in Investing

Jeff Santoro: Yeah, I'm glad Tyler brought this up. We tweaked what he asked us a little bit or suggested to us a little bit, but it crosses a lot of things we've talked about in the past, including signal versus noise and trusting your gut and all these different things that are a little bit squishy in investing.

And we're going to try to nail some of that down.

But before we do, quick housekeeping. Please feel free to reach out to us at any time for comments, questions, feedback. You can get us on Twitter @InvestingPod. You can email us at [email protected]. Check out our YouTube channel, subscribe to the newsletter.

And we got one more Apple review. So thank you. fillmorea, I guess is what I'm, I think that's how it's pronounced. Another five star review, a rating and a nice review. 

So if you're listening and you're enjoying the show, the single best thing you can do to help us spread the show to more people is to give us a rating, give us a review and let a friend know. That would be great. 

Jason Hall: So yeah, they called out the, they called out the the newsletter too. Said they were looking forward to the newsletter. That [00:03:00] was awesome. 

Also said that-

Jeff Santoro: we're improving very quickly. 

Jason Hall: And I'm translating that to mean that we're getting even better.

Jeff Santoro: That's what I heard. I hope it's that and not like it was so bad in the beginning that I'm glad they're at the 

Jason Hall: watch because it was like a car accident. 

Jeff Santoro: Well, we'll stay positive and we'll just assume that it was a meant to be a compliment.

Jason Hall: But in all seriousness, thank you for that great review, very much appreciated.

All right, Jeff, onto the show. 

Jeff Santoro: All right. So the basic premise was. The idea of, I think the way Tyler phrased it to us was investing as what, how did he put it? Art versus craft. Art versus craft. Thank you. And that got our wheels spinning and got us thinking in a whole bunch of different directions.

 So I think what we're going to do, Jason, is answer the question in a bunch of different ways, and I think it'll take us down some interesting paths, and I think it'll eventually end up bringing us to some specific companies where some of these ideas really came in to, impact the way that you and I invested, either buying or selling or holding.

So I guess the [00:04:00] place I wanted to start is the idea of trusting your gut, because this is something I've talked about before I've thought about before. And I've actually interestingly, old guest of ours actually recurring guest of ours, Jim Gillies (part 1, part 2). I mentioned it to him once and assuming he would say immediately that trusting your gut is a bad thing because he's a very data driven kind of guy.

At least that's my impression of him. 

Jason Hall: Yeah, no, it's true. 

Jeff Santoro: And without going into super detail, he basically said, in 

the right circumstances, he didn't think it was that. Yeah. That bad of an idea to trust your gut. And I'm not going to say anything more because I don't want to put words in Jim's mouth.

We didn't really have a long conversation about it. But ever since then, I've been wanting to talk about it. So we're going to do that today. So when we think about trusting our gut in investing where does your mind go first? 

Jason Hall: So the first thing it does for me, honestly, is it sets off flashing red warning lights.

It absolutely does. And I think that's particularly true. In terms of it being danger, danger for new investors, young investors inexperienced investors, because [00:05:00] your gut is entirely tied to your emotional wiring. Entirely. And we talk a lot about biases, cognitive biases. And we've learned from people like Morgan Housel and others who've talked about the pain of loss hurts more than the pleasures of gains feel good.

So those urges often are like our base instinct, our base emotions telling us to do things. And we know that again, because of the way we have evolved as an animal, like that, we look for patterns. We look for signal and in a market filled with noise and we find false trails all the time.

So I think by and large guts are full of crap, right? And when you follow your crap, that's what you're. You're dealing with. That's the first thing that comes to mind. 

The second thing that comes to mind is as you find your footing as an investor, and I don't mean you've been investing for six months and you did pretty well because it's all luck.

We know in short periods of time, but like myself, it's taken me 15 years to really fully wrap [00:06:00] myself around like my emotions versus my intuition. Right. And separating when my intuition, And maybe that's a better way for me to say when I'm thinking about, like, my investing gut is really what my intuition is telling me.

For example a stock that did really well with earnings was Confluent and Jeff, that as much as I've said, I don't understand the nuts and bolts of the business and like the real technical stuff. It was really clear to me from following this business closely. That's what the business was doing and how the market we're treating it had become separated. And I was, have been very bullish on the business. And I've told just about anybody that would ask me about it and they reported earnings and answered a lot of those questions and the stock did very well again, it's. We don't know the full answer about whether my intuition was correct.

But there's plenty of other people that, that your gut as a new investor, you bought it six weeks before it earned and it popped and you're like, Oh, I'm really good at this. I'm going to sell now. I made some money. 

Jeff Santoro: Yeah. I think that's the important distinction, just in [00:07:00] hearing what you said sticks out to me, which is trusting your gut, it probably is more dangerous the newer you are and probably less gut and more just seasoned intuition as you get to be a more experienced investor. I think I agree with that. 

And because I think everyone who's new at this, and I'm newer, I'm new enough to remember some of the things that happened when I was brand new.

And you trust your gut when you're brand new and it goes well, and you think you're a stock market genius. And for me, I happen to be trusting my gut and doing well in a time when so was everyone else. It wasn't until 2022 that I was like, Oh, okay, right. 

Jason Hall: You've gotten a decade's worth. Any investor that started investing anytime in 2019 or early 2020 has gotten 10 years worth of experience in four years. I absolutely believe that. It has been such a bonkers period. 

Jeff Santoro: Yeah, and I so I think generally I Agree with you. There's a couple places where I think I want to push back a little and get your thinking. So the first thing I think When I think trust your gut one of the things that jumps to mind where I think you actually [00:08:00] Probably could trust your gut a little bit is when your gut's BS meter is going off. Yeah, so and I've been thinking about this a lot recently because sometimes I'll Look at the results of a company that reports earnings and all if I happen to own it I'll update my spreadsheet look at all the numbers and all and I'll have this thought in my mind about where the business is going. Then I'll go read or listen to the earnings transcript.

And sometimes what I'm seeing is maybe not like a fatal thing for the business, but just what I'm anticipating to be a slow or a slower period of time coming up.

And then you listen to the earnings call and it's, we're going to the moon and it's this and it's that and everything's great and there's nothing wrong . And completely glossing over what could be short term, but still is going to be a short term challenge. 

And that's, sometimes my gut's telling me, like, I don't, my gut's telling me the numbers are right here and the CEO is just spinning, right?

So I think if your gut trusting is on the side of hitting the brake a little bit, [00:09:00] or at least pausing and thinking and doing a little more research, I think that's one way where I think you could do it. But a little bit more specific to actual making a decision, I want you to know what you think about this.

I think you can trust your gut a little bit in the way you invest if you use position sizing to your advantage. So,

Jason Hall: Yeah, I like, I like this. 

Jeff Santoro: If you're going to trust your, like, if you have a really good feeling about a company for whatever reason, maybe it's just that you hope it will do well.

We've talked about story investing in the past. I think you can trust your gut a little bit and buy a not consequential amount of that stock, whatever that means for you. An amount where it'll keep it on your radar, you'll track it, keep it, follow it. But if you're totally wrong and it goes to zero, you're not going to be unable to retire.

Right, right, right. And I think in that sense, I don't know, this isn't investing advice. But I think if you think of it that way, I think we can all trust our gut a little bit more. Because I know you brought up pain feels worse than gain. But one of the things that's [00:10:00] particularly painful for me, is if I'm convinced in my gut to do X and I don't do it.

And then six months, eight months, ten months later, I was right. And I'm like, Oh, I shouldn't have trusted my gut. So I want to hear your thoughts on that. 

The last thing I'll say though, before I let you talk is like, this is where writing down in some sort of fashion, what you're thinking when you make a decision, I think especially if it's a gut related decision can probably help you.

So you can look back and say, Oh, the last four times I trusted my gut, I was right or wrong. Maybe that gives you, I don't know, little bit of. Extra data moving forward. So what do you think about position sizing as it relates to trusting your gut? I 

Jason Hall: think broadly for most individual investors who are still primarily somewhere in their, their prime earning earnings years building their wealth, right?

Not sitting on a large portfolio and they've retired or maybe they spent 20 years with a 401k and now they're rolling it over and they just got into stocks five years ago and they got a quarter million dollars, right? And they really don't know what the hell they're doing. I think by and large, yeah, that is the [00:11:00] best way to protect yourself against ignorance and overconfidence, right?

I think that's, and usually when the gut's involved and you're buying it's overconfidence is the failure mechanism, right? And it can be tied to FOMO. Right. So some of the things you talked about there, I think are really good. So position sizing definitely agree with that, but also keeping some record of why and really being able to very clearly describe why yes, why now, why this.

And so you can kind of reality check yourself that you're not getting excited because the stocks gone up, you learned about it two months ago and it went up 25 percent over the past six weeks and you're mad because you didn't buy it a week after you first found out about it, right? That's FOMO. That's not a legitimate reason to buy the business, right?

So being able to really describe why I think is important, whether you're writing it down or you're telling yourself in a mirror, however you're doing it, right? But having a clear reason why it makes sense to buy [00:12:00] this investment that separates it from FOMO, I think is really good. And then position sizing is a further way to make sure you're not chasing something, right?

Because of price movement or whatever. 

Jeff Santoro: Yeah. One thing you said triggered another thought in my mind, which is, I think the more experience you have, and I think the right time to trust your gut is when you've, to the best of your ability, Considered both sides of how something could go and it's like a, it could go this way or that way.

Maybe your gut is the thing that determines what your decision is. Yeah, and I think that's very different than, like you said, a completely uninformed or solely stock price driven, or you saw something on the internet. I think that kind of trusting your gut. You know knowing nothing about the business and just being like that's brilliant buy. Like I don't think that's the kind of trusting your gut that I would ever get on board with, right?

Right, but it made me think of like our conversation two episodes ago where we talked about Confluent and [00:13:00] Procore, the episode where we talked about knowing the things we don't know. And I remember at one point talking, both of us were basically saying, here's what I think could happen, but here's the opposite of that.

And because I'm not an expert in this area, I don't really know. But I think for both of those companies, any decision we've made or will make in terms of buying or selling to some degree is going to be gut based, right? Because you don't ever really know the future. It's informed by data and information.

So I just want to be clear, I think, as we talk through it, like, that's the kind of trusting your gut that I'm talking about. 

Jason Hall: We're moving, the idea is to move away from binary thinking into thinking probabilistically. 

Jeff Santoro: Yeah, I like that. Yeah.

Jason Hall: One other thing, there's one thing I thought about when you were Talking about there's the story management's telling you on the call or in the presentation versus what you're reading in the filings.

And I think you'll appreciate this, Jeff, as a musician, a family of musicians and involved in educating in arts and music. I think about it like the 10 Q and the 10 [00:14:00] K. Proxy statement, those are like, you know what? That's the sheet music, right? That's it. That's the sheet music.

And then the earnings call and the presentation, well, that's the performance and like you're watching the performance and then you're reading the sheet music and you're like, well, that's son of a bitch is singing a different song. That's the test, right? That's where, this is what it says. And then this is what you're doing.

It's they don't match up. Right? And that's the BS meter part. Right? 

Jeff Santoro: Yeah. And that is a little tangent. And then and then we'll go on to the next kind of topic here. But that's one of the reasons I like listening to earnings calls versus reading them, because I think it's a little bit easier to. Have a gut check on management and what they're saying when you listen to something and just the tone they take, especially when analysts ask them questions, are they defensive or are they transparent?

Are they aggressive? Are they kind? Those things I think can help you when you're, when your gut's telling you one thing or another to confirm. 

Jason Hall: The one caveat I'll put to that Jeff is that you, the context you need to do is you need to be thinking about how did that [00:15:00] CEO, Behave and speak compared to the last two or three calls that I listened to.

You can't compare them to some other CEO because people are very different and really dynamic salesy CEOs can tell a great story. And you can have the guy that would just as soon be, focused on capital allocation and operations, who's terrible on a call, who's the better CEO, right? So I think that's important.

You need to contextualize it with comparing that person against themselves, not against anybody 

Jeff Santoro: else. 

Yeah. That's fair. That's fair. So I think kind of one step away from investing or not investing with your gut is the whole conversation around signal versus noise. And especially now where, unless you completely pull yourself away from any sort of social media or, YouTube videos or anything and just read sec filings and press releases and things like that, it's really hard to ignore the noise.

Yeah, so I'm curious what you're thinking is on the signal versus noise piece and how that might impact the way you [00:16:00] think about things as it relates to investing with your Gut. Or maybe the art versus craft kind of way of thinking about it. 

Jason Hall: Yeah, the bottom line is that the financial media broadly is noise if we're being honest right there.

It's all hand waving and clapping and making noises to get your attention right to keep your focus so they can feed you ads or get your subscription revenue dollars or whatever it may be. 

Not this podcast, obviously, certainly not our newsletter with its three advertisements. 

Jeff Santoro: No. 

Jason Hall: It's included. 

Jeff Santoro: Absolutely. 

Jason Hall: In it each week.

But no, seriously, that's the reality is that it can be very hard because noise is the dominant factor.

But it's the same way in nature. Go through a walk in the woods at night, right? There's a lot of noise. The signal is harder to find, but it's the thing that there's less of, right?

I think that's the biggest thing. And it's our, and marketers are really good at this stuff, right? They know fear, uncertainty, and doubt the things that fear and greed, right? Those are the things, the two base emotions that drive us. And they're really good at feeding those things to us to keep our attention.

[00:17:00] And it can make it much, much harder. And it can also cause us to follow the gut, right? So this is to me, like, this is their hand in hand when it comes to that. And I encourage people. 

My best answer to this is two things are going to happen. Number one, you're going to hear lots of noise. You're going to chase false signal.

And you're going to look for bias- confirming signal. 

Jeff Santoro: I was just going to say, can confirmation bias is a thing you have to watch out for it too. 

Jason Hall: It is a thing. And you will be able to find as many things that tell you that you're right about your investing idea is you want to find. All it takes is being wrong about one thing.

Right, and that's why I think it's so important that instead of looking for evidence to support your thesis, You should be constantly trying to disprove your thesis, spend more time doing that, and you're going to find far better investing success. 

Jeff Santoro: Yeah. One of the tricks that I play is something I call everyone's an idiot. Which is everything I read on the internet, no matter who it's from, I view it as like, what if I really [00:18:00] do think, what if this person is an idiot? 

And I don't, obviously I know some people on the internet that I interact with, like if I see something from you or someone else that I respect- 

Jason Hall: I think the difference, Jeff, is that you really do just think everybody's an idiot. 

Jeff Santoro: Well, I didn't want to say it like that.

Jason Hall: Sorry, I said the thing out loud. I apologize. 

Jeff Santoro: No, but honestly, like if it's almost like a filter that- 

Jason Hall: Yeah, well, it's just apply, exactly. You're just applying a critical eye to everything you're consuming. 

Jeff Santoro: And it's exactly. It's basically what you were just saying, which is a way to seek out the opposite of confirmation bias, right?

Things that disprove what you're thinking. Because, you're gonna find someone who you see it a lot during earnings season, right? Like, company X reports, one person on Twitter say, Great quarter to the moon. And then you see the next person say, average quarter wasn't happy with these things.

And then you might find someone else who says, I thought this quarter was terrible. I just think to myself, they're all wrong. And try to make a decision for myself. Now I don't know if that's just the way I'm wired. I, or just the fact that I'm old enough and I've been around long enough to know that's how the internet is.[00:19:00] 

But that's helped me cause I, and I'm, I fall prey to it. To like, I'm not saying I'm this like person who's above it all when it comes to the Internet and going down rabbit holes about certain things. 

Jason Hall: I've seen your investing returns, Jeff. I know. 

Jeff Santoro: I know. Yeah, they're terrible. But that's one thing that I try to think is just like, what if everyone is wrong?

And it just makes you think more. It just makes you seek for information that is, does not confirm. 

Jason Hall: I think the reality is that we, again, we're wired to, to respond to you clear takes. Take a position. 

Think about we're getting into political season and debates, right? There's this expectation that politician A answers the question and takes a stand and it's almost like politician B has to take a diametrically opposing take, right? And we're wired to react and respond to those things.

And the reality when it comes to Quarterly earnings is an example. Company's financial results.

There's almost always a lot of nuance, right? 

Jeff Santoro: We live in a [00:20:00] black and white world in terms of the media, but there's absolutely gray everywhere. 

Jason Hall: Oh yeah, absolutely. Well, it's more than gray, right? It's many multi spectrum color. 

Jeff Santoro: So would you say there's like 50, 50 shades of gray out there?

Jason Hall: Jesus. I apologize, everybody. 

Jeff Santoro: You're welcome.

Jason Hall: Nice. Well done. 

Jeff Santoro: So I'm going to tie together the signal versus noise idea and the trusting your gut idea. I think the trusting your gut can be a way into a new stock in terms of a small position size. But then I think Getting to know the business is what helps you find the signal through the noise, right?

Jason Hall: The sheet music versus the performance. 

Jeff Santoro: Yeah, because like for me, like the last thing I'll say about the signal versus noise debate is If I know with this company, I want to see these three or four things and there's noise about stuff other than that I might take it into consideration, but I have to keep reminding myself, like, that's not my thesis for owning this company.

That's not what I'm, what I, it's not what I've determined to be the most important factors. And I think [00:21:00] that can help you. 

Because sometimes companies go through rough patches that last years. And, You got to try to hold through it to see the long term huge gains. There's story after story about a company that trade sideways for a few years or a few decades in the case of Microsoft.

Jason Hall: Yeah, well, Activision Blizzard is a good example 

Jeff Santoro: too. 

And Tesla did it. 

Jason Hall: Yeah, there, yeah there's plenty of examples and that's why it's so important to have that critical eye to, to separate the narrative from the performance of the business. And then have a critical eye about how you process that information.

Because I think that a lot of times that's where the intuition comes in, right? The experience, real intuition that can help you find value and opportunity and also help, it's like, you know what? It's time for me to move on as well, right? It can work both 

Jeff Santoro: ways. 

Right. So the whole idea for the show that came from Tyler was inspired by him listening to an interview with Aswath Damodaran and where one of the points he made was we have a ton of data, we have probably too much data, we have all the data we [00:22:00] need. But we don't have a lot of information.

And a way to process that data and a way to think about that data. And the point he made in the interview was, I think the exact quote was, I think we should read more and I'm sorry, read less and think more, making the point that the real, the rubber meets the road where you take all the data and synthesize it to make a decision.

And this is pertinent for our conversation we had before we hit record, because every time you spend any time during the day not working, you say you're thinking, and I, Bust your chops about it. In all seriousness I actually do think that's really important because once you have all the information, once you have the earnings results and the, all the metrics and the KPIs and the top line and bottom line and all that stuff, you really do need time to just think about it.

You can spend 15 hours each day just finding more and more information to read about a specific company or an investment. But that's just going to get diminishing returns at some point. So I thought that was a really cool part of that interview. And I think that's part of what inspired Tyler to [00:23:00] reach out to us.

But I wanted to know what you thought about that. 

Jason Hall: Yeah, it's, and it's interesting too, because in, in the chat with Tyler, he pointed out something I think is really important here. There's not a lot of Aswaths in the world, right? That this is one of the great valuation experts on Earth. Deeply intelligent, deeply talented individual, and his ability to practice the art side of this is something that most people simply don't have.

Because if you think about great crafts people, right? So again, art versus craft. Artisans, I'm going to say artisans. So whether it's a sculptor or a painter, a professional athlete, right? I think at his peak, you could say that Tiger Woods was an artist on the golf course, right? You say the same thing in every sport . The ability to perform and deliver these incredible performance or incredible pieces of art. 

They're not just people that are really talented. These are people that have also spent thousands of hours learning the craft [00:24:00] that they are artists in. So they're not mutually exclusive.

And I think it's also unreasonable to think that you've spent six months or a year or two investing in, studying the markets and consuming information, that you've necessarily gotten to the point where you can successfully regularly do some of the more nuanced things that people that have been around and been in different environments and seen, this similar opportunity.

In a different company in a different year, right? So I think that's really important because a lot of it is pattern recognition that's not false pattern. And a lot of that, it just does take a tremendous amount of experience. So my pushback on that is, sure. You've been doing this for 30 years, right? You can do a lot of those things without really thinking about it because you've spent so much time reading and you've built up that database and spent a lot of time thinking about it. 

But I will say that it's interesting for me. Jeff, it's really only been in the past, I would [00:25:00] say five or six years that I've gotten to the point where I do that.

And I've built my routine. I do some woodworking. Avid gardener. I used to run, I had my third knee surgery last summer, I don't know how much of a runner I'm going to be going forward. But I like getting in these environments where I can do something where I only, I need to be focused on what I'm doing. But part of my mind is also free to just process things. 

So a lot of times it's the thinking to me is not thinking about Microsoft's last three earnings report. It's not actively thinking, right? It's processing that's happening and you're not actually thinking about that thing, but your brain is working on it and you're not even necessarily conscious of it.

Jeff Santoro: Yeah, I agree with that. I think what it got me thinking about was not rushing to decisions. And I struggle with this myself. 

And it's funny because it's very contrary to how I am in some other ways. I'll spend [00:26:00] four days deliberating which $25 toaster to buy. But I will, I'll spend six minutes making a stock decision, even though that's multiples more expensive.

And it, and I think part of that's just cause like the price can change, like the toaster is going to be 25 bucks today or in three days from now versus like a stock could theoretically pop or drop double digits in a moment's notice. So I, I get why there's a little bit more. 

Jason Hall: It's the wiring too, because it's the capital D do capital S something, right?

We feel like we need to be Doing Something. 

Jeff Santoro: And sometimes doing nothing is exactly what you need to do. For many reasons, just to slow yourself down, to give yourself time to think and process. But I thought that was an interesting way to, to think about it. So we've been talking for about a half an hour now about all these different ways to think about this.

I'm curious if you have any specific companies in mind that are examples of any of this, any of the things we've just talked about. 

Jason Hall: Yeah, so I think a good bad example of narrative versus numbers certainly one that has been a [00:27:00] value trap for me, Walgreens Boots Alliance. The narrative has been, and I invested through the bulk of Roz Brewer's relatively short tenure with the business and now they have somebody from the healthcare industry that's come back in.

But the whole idea was you have this steadily declining, particularly in the U S but this steadily declining retail pharmacy business at Walgreens Boots Alliance. We've seen like CVS become CVS Health, which is this more fully integrated health management business with insurance and pharmacy benefits management and their retail business.

And the idea was that Walgreens was going to be able to leverage this retail footprint and the Trend and the goal. There's a big need to increase access To more as needed health care, right? It's not er maybe even not urgent care, but it's not your primary care going for your checkup But just little things along the way so a little bit of the kind of the [00:28:00] urgent care thing with these clinics inside their physical locations.

And frankly, CVS has struggled and stumbled with it. And Walgreens has really had a tough go of it and it just hadn't delivered. So the narrative was going to be, but we're going to do it but we're going to do it, but it's going to happen. We're going to, we've made this change and they continued to pay this dividend and increase it and pay this dividend and increase it even as their cash flows were weakening.

Solidly profitable business, but they were selling off, steadily selling off a stake, an equity stake that they held in another company, basically to pay the dividend, to float the dividend. And, Roz Brewer couldn't do it. This new CEOs come in, they've slashed the dividend, huge losing investment. 

And it was a losing investment during a time when overall the market generally did really well, 2022, of course, was a bad year, but you know, we've more than made up for it at this point. So then there's also the opportunity cost. 

That's definitely [00:29:00] a case where the song they were singing did not match up with the music they passed out before the performance. 

Jeff Santoro: Yeah, that's a good one. The one that... I have three that sort of come to mind and they're all in the same bucket. But I'll talk about Peloton because now that's what I invested in early in my, early in my like learning, and it was also during the pandemic. 

And so I'll give myself a little bit of a pass, but it's funny because I would never invest in a gym as just as an example of my thinking at the time versus what my logical brain probably should have thought. And it's because I have 

Jason Hall: Jeff's brain: this time, it's different. 

Jeff Santoro: Well, I would never invest in physical activity, and I would never invest in healthy eating in America. I just wouldn't. Like, We're not a healthy country, just generally. Diets don't stick. People join gyms in January, and they stop going by February. But I got so caught up in the noise and my gut With Peloton because a lot of people I knew used it and we had one in our house and because it was still the [00:30:00] pandemic, like everyone we knew was on it and they were riding together and it was all this cool stuff.

Jason Hall: Anecdata. 

Jeff Santoro: And what was that? 

Jason Hall: Anecdata. 

Jeff Santoro: Yeah. And I probably even at the time, if I'm being like honest, probably in the back of my mind was thinking like, there's no way this lasts.

But I made myself believe it. And, I love to think that if that happened right now, four years later with what I've learned, I wouldn't make the same mistake. Or if I did invest in it, I would do it much more cautiously with my eyes a little bit more wide open and to see and that kind of stuff.

The reason it came to my mind first is it was probably my first wrong trust your gut decision. And it wasn't wrong because it ended up not working out. It was wrong because it was based more on belief and hope and then it was numbers or at least maybe my understanding of where those numbers could go.

Because the numbers were good if I'm being honest, like it's not like they weren't seeing rapid growth. It's just I was thinking that might stick around forever or not understanding how the valuation would be impacted if it didn't.

So the other two that I think fall in the same general [00:31:00] category for me are Stitch Fix and Blue Apron. Yeah. And again, it's, it was anecdata. Yeah. And good results over a short period of time, and people thinking that the world was now different, and now people were going to be cooking at home more, and people were going to be buying clothes that robots pick for them.

And those were just trends that didn't last, because as soon as malls reopened, people went back out and bought stuff. bought clothes in malls. As soon as people could go out to restaurants again, they stopped cooking at home. 

Jason Hall: Well, and I think food, ironically so many more supermarkets have delivery now. I think that's also affected blue apron. And so to me, like those, all three of those, but especially Stitch Fix and Blue Apron. 

Perfectly good businesses aren't always great investments, right? The great idea can be a fine business, but can also be an underperforming or even capital destroying business for investors. That's the big lesson for me. 

Jeff I feel like we have to talk about Netflix

Jeff Santoro: Yeah, that's a good one. 

Jason Hall: For a couple reasons. I'm gonna eat a little bit of crow here.

[00:32:00] But first I want to talk about the good Netflix story and this is one that I personally benefited from. Jeff I don't know if I've ever told you this story, but Netflix made the down payment on My first house that my wife and I bought. It really did. Because of the Qwikster debacle.

I don't know if a lot of people remember this, but you go back to, I think it was 2011, roughly. That summer, the stock, split adjusted, it's a lot more now, but the stock at the time was 375 a share, like was where it peaked at. And they were buying back shares that summer. 

And the stock was just crazy expensive. I'd say overvalued really was a fair way to think about it. And then, this was like early in streaming. Their business was sending DVDs, mostly DVD by mail. That was their business. And it was a cash cow. This business absolutely pumped out cash. 

Blockbuster was basically done, right? There weren't any emergent competition. Redbox, like that [00:33:00] was like the big threat back then. But their CEO, the founder, Reed Hastings, he was already looking ahead, right? He was already seeing, because they had disrupted one of the great 20th century stories with Blockbuster Video, right?

They disrupted that business. And so he was constantly on the look for the next disruption. And streaming was going to be obviously it because what's even easier than having DVDs mail to you? Hitting buttons and watching stuff.

Jeff Santoro: Not having them mailed to you. 

Jason Hall: Yeah, right.

Exactly. Just take the physical component completely out of the mix. So their streaming business over the past few years before that had really started to grow and get traction. And it got to the point where it was generating positive cashflow. The DVD business was starting to decline. It was starting to decline. And he made a decision to split it off.

They were going to split it off and there was going to be a business called Qwikster. K, right? No. Q. W. Qwikster, right? They've made the website. They announced it. They were going to split it apart. I think, like, the big thing is, like, they couldn't even get the [00:34:00] Twitter handle Qwikster because somebody had it, randomly had it, right?

Like, it was like, the whole thing was a debacle. And they announced it and I don't know, a month or two later earnings came out and there was a decline in membership. And like, this was absolutely out of nowhere that there was going to be a decline in membership.

The stock fell some 70 percent from the high over about a six or nine month period. They quickly reverse course. Hey, this is a great idea, but it's a dumb thing to do now. Obviously our customers have spoken.

When the stock fell, this became an apparently wonderful opportunity. It was absolutely apparent. It was a wonderful- 

Jeff Santoro: In hindsight or in the moment? 

Jason Hall: In the moment. In the moment.

You talk about gut. I was traveling and back in those days you didn't have your app on your phone, right, to buy stocks. It's been that long ago enough that it wasn't so easy and I didn't have a, I didn't travel with a computer. So I, like, I was freaking out because I needed to buy shares. 

And then I [00:35:00] finally calmed myself down. I'm like, you know what? I can just wait a week and maybe the stock goes up some, but there's, it's still going to be just a wonderful opportunity. 

And then seven or eight years later, I ended up selling the stock to make the down payment on my house. It was that, that remarkable of an opportunity.

Because the narrative and the numbers had diverged so much. There was the narrative from the street, but then there was the, what the business was doing to react. Answering the questions fixing it and their trajectory was clearly going to be very good. And the market had substantially oversold the stock.

More recently, Jeff, I got it wrong, right? 

Jeff Santoro: And we did it. We did a Rough Cut about it. You can go back and listen to rough cut six from October. Jason was Wrong About Netflix to get the full story. But you can tell it again here. 

Jason Hall: The short version was, right before they rolled out advertising, we've seen this massive explosion in streaming with everybody has a streaming service, right?

And we're about to see a ton of consolidation, but there was this massive land grab over the past three years or so in streaming. And I became fully [00:36:00] convinced that the market had become very mature for Netflix and it was going to really struggle to be able to grow. 

And the stock had come down a ton, and you texted me and you said, well, what do you think?

And I said, Netflix is done. I think the stock's probably tripled since then, roughly, right? 

And their business is reinvigorated. They rolled out advertising, continues to grow. Their margins are better. And now they've done, they're going to bring, they're going to have live sports in a year, right?

They're not screwing around. They continue to iterate things that we thought they never would. Because they're doing the right things to take market share and to grow the business. 

Jeff Santoro: Well, to be, to be clear, what I said to you was, is it me or is there actually good news and is this not, is the report not as bad as people are making it out to be?

And then you said it was done. But and I only mentioned that to humblebrag a little bit, but it was also because it's exactly the point I think we're both trying to make, which is there should be something to back up a gut feeling. And what I was seeing, because I think at the time I still owned it and I sold it because of that conversation.

I, it was [00:37:00] more about, I probably already own so much Netflix in my index of funds that I just wanted to get rid of some of my big tech stocks.

And I just bought it and it wasn't, it was a tiny position. Different story than like you having bought it back in 2011. I remember thinking at the time, it seems like everyone's wrong about this.

Like, yes, it's, there's, more competition. Cool. Like I get that. Especially once it, took a, whatever it was, I think it was a pretty big dip that one earnings call where there was like this, that when they announced like they had lost subscribers year over year. 

Jason Hall: Got smashed. 

Jeff Santoro: Yeah. And I remember thinking like, well, yeah, like, of course they did.

There's a lot more competition, but I would imagine they'll figure this out now. I'm no genius. I didn't double down and buy it. So I'm not trying to say that I had the same doubts everyone else did. But it's a time I remember having this conscious feeling about the way my gut was feeling or the way my brain was thinking about this versus what the market was saying. What Twitter was saying.

What people like you were saying who were clearly wrong. I just want to point that out one more time.

It's a [00:38:00] great example for the good and the bad, as you put it, you got to see both sides of that particular stock. 

Another one that popped out to me thinking through stocks I have owned in my time is Zoom because that's another one where I guess I could put that in the same bucket as the other ones I mentioned.

I was just so convinced that we were all going to be online more. And the time where I, looking back, the time where I should have believed what I was starting to think was, I remember people at the time saying a bear case for Zoom was Zoom fatigue. And I remember thinking like, well, of course we're all tired of it, like, because we have to do everything on it.

But as soon as we can, like, choose to use it, it'll be a different situation. And I think that's correct. I think I was right. 

But again, I didn't understand, yeah, but it's being priced like everyone's gonna keep using it forever. And I think that Zoom fatigue led to people wanting to be back in their offices and wanting to have in person conferences again and wanted to see their families on holidays and not do Zoom Christmas.

It's funny how many of these sort of fit into that [00:39:00] same bucket. And I think it's a good reminder that when craziness happens, whenever there's an event, whether it's a pandemic or a, a terrorist attack or a financial collapse, more of these sorts of feelings and things are going to come.

And the whole conversation actually makes me think of Peter Atwater's book. We had Peter on last year, The Confidence Map. Which I'll plug over and over again, because I think it's, it has so many good corollaries to what we lived through for the last couple of years. 

Jason Hall: I'll put the, I'll put the link to that show in the transcript. So go if you sign up for our newsletter, you will send it, we'll email the transcript to you. It's InvestingUnscripted.com. I'll have the link in there for anybody who wants to hear that one. 

Jeff Santoro: Yeah, it was just a great conversation and he's pretty active on Twitter. I just would give him a plug on Twitter as well.

And the more marketing, I'll put his Twitter handle in our. Yeah. Put that in there too. The more market mania we see, the more he drops his little nuggets like, see, this is what I'm talking about. 

Jason Hall: Yeah. I think he and Morgan Housel are two examples of great, like, I don't want to say almost as like they're almost historians [00:40:00] of they've recorded human history when it comes to how our behavior intersects with finance and investing in decision making.

Jeff Santoro: They're good observers of the market. I think that's how I would. 

Jason Hall: Yeah. Right. Right. And the reality is that when this time it's different means that people are going to behave different. It's usually a bad thesis. 

And that's Zoom, but I will say this too. The thing with Zoom is like, it's important to remember to separate the stock from the business.

Because Zoom has continued to be a pretty wonderful business. It's incredibly profitable, tons of cash, great balance sheet. Well run. They keep adding stuff and doing stuff. It's just for a long time the expectations of what the business was going to be caused the stock to be so detached. 

And it's, I say that Jeff, because it, and the Netflixes of the world, I don't think there's any argument that at its peak, Netflix wasn't also a little bit detached from its potential. And then it swung the other way is so you don't lose focus of the really good [00:41:00] businesses because sometimes the stocks get really cheap. 

And it's like, Oh, you know what? That's still a really good business. And now it makes sense, right? That's where your intuition can serve you well. 

Jeff Santoro: I agree with that. So before we wrap and take a quick break, and then we're going to talk about one of our mini portfolios from last year, when we come back after our break, there's two more stocks, I think we need to mention because They go together.

You and I talked a lot about them over the last couple years and for similar reasons. And that's Amazon and Target

And I put Amazon on my list for this show because that's one where at least so far I feel like trusting my gut was correct. I was, I just felt it in my core that the troubles they went through over the last couple of years were because of the pandemic and the things they had to do to meet demand. And I just felt like that's going to figure itself out over time. And AWS growth slowed a little bit, and then people got concerned about that. 

And I remember thinking, well, I think people are still going to be doing things in the cloud. So I'm [00:42:00] not really super worried about that. And over the past year, the stock's done great. And the business has recovered and operating income has shifted from negative to positive. And that's all gone well. 

Now, the flip side of that for me is. I thought Target would because of the same thing like their quick pivot to curbside pickup and faster delivery and the fact that there's a Target right down the road from my house.

I can get something actually quicker from Target and not be any less convenience really like I can just drive up and they'll bring it to my trunk. Like I really thought that they would benefit and that's where my gut was wrong again. Like I was right on the Amazon thing, but I was a little bit wrong, or maybe I was early, I don't know on Target. 

I want to see if you thought about those two because we've talked a lot about them. 

Jason Hall: I think this is a perfect example where I mentioned earlier what the guts full of and understanding your own biases. And I have an unhealthy bias against very large companies.

And it's been to my detriment over the past. 

Jeff Santoro: Yeah. How's that worked out over the past year?

Jason Hall: That's the, right. It's certainly [00:43:00] made it harder for me to deliver the kind of returns that I've earned over the past 15 years. Right. To actually generally do better than the market over that period and generally not own those stocks at all for most of the past five. So maybe that's a humble brag to even put it that way.

But it's because I'm always on the hunt for newer, smaller companies, that I've missed just the sheer market opportunity for things like the cloud. You mentioned Amazon. How such a well built business that, that, that whole model of being its own best customer first for things.

Like they built their cloud infrastructure to serve the business. And it became a thing that, well, there's a huge demand. We can sell this really good margins. Because of my bias to not be interested in owning some of those large businesses, my intuition leads me the wrong way, right? Leads me away from finding those investments. 

But I think you're spot on because you follow that business closely and you identify the, while a lot of the market was looking at the cloud stuff and like seeing that [00:44:00] was the growth was slowing there and all the stuff that was going on with Silicon Valley bank, right?

Because a huge cohort of their cloud customers are tech startups. And fear that was going to, like, part of the contagion might actually affect AWS.

And I remember your thesis was really simple. It's like, they just need to get their crap together with their e commerce business, right? Get their cost structure in line.

And that's what's happened. AWS has done fine. It's done well. An outsized portion of their improved operating results are just fixing their operations on the e commerce side.

And you called that and you were absolutely spot on.

The thing about Target that's interesting to me is my intuition was that was the same as yours. That they were largely set up to benefit from that.

And so a couple of things, weird things happen along the way, right? You become a political Target. Some of their social stances and some of their things that's gone weird, right? It's the Budweiser effect. When you're when you mess up with those things, weird things happen. Who could have really predicted that?[00:45:00] 

And then a lot of the mass retailers, like just their inventory was the wrong inventory. And it wasn't the e commerce lift wasn't enough to make up for the struggling parts of the business. And I read with Amazon. Well, everybody was worried about AWS, which is massively profitable, right? So they had a massively profitable business.

And then their other business got even more profitable too. 

Jeff Santoro: And I think, the two, the big thing with Target first, it was the. It was the inventory mess up back in, I think it was 2021 and then, yeah, they were on the wrong, they had the controversies around the political stuff and wherever you come down on those, the bottom line is it impacted the business and that's all we need to say about it.

And I still think they're going to be fine. Like, I think what I misread in terms of how quickly they'd be fine is as ubiquitous and huge as they are, they're not Amazon. They're not, my biggest bull thesis for Amazon, the e commerce company, is like, the very first place I think anyone goes to look for something that they want is on Amazon.

Whether you buy it there or not, [00:46:00] like, the first thing I, anytime I need anything, I look there first. And I, and maybe I go to Target second or third, but it's still not first. So I think that's the big difference there. 

Jason Hall: Yeah, that's true. 

Jeff Santoro: All right. So we're going to take a quick break and then just have a short conversation about a mini portfolio that we started last year that involves my father and me winning a contest.

So we'll be right back.

Jason Hall: Hey, buddy. How's how's Nick been? 

Jeff Santoro: Nick's doing well. So for anyone who has-

Jason Hall: Have you raced Nick 

Jeff Santoro: yet? 

I have not. I have not done that yet. For anyone who missed this, I will briefly recap the story. So last year I entered a raffle and I won and the prize was $500 and I won with a ticket that was given to me as a gift from my father.

And my father is one of those people who like, if he buys you the lottery ticket and you win it. He will jokingly, although part of me thinks he's a little bit serious, believe that he should have some cut of the winnings. So he had an idea where he wanted me to spend the money buying [00:47:00] a stock I would never buy.

And I was like, well, how about instead of that you pick five stocks and I will buy them in my actual portfolio with that $500 I'll buy $100 of each, no matter what you pick. I will buy it.

But I encouraged him to make decisions based on anything he's learned from listening to our podcast. 

The reason we're talking about this now is so far since October 3rd, it has worked out pretty well.

And I'm a little bit surprised because I think he picked five good businesses, well, four and a half.

 But he picked them all at kind of high prices. And I remember thinking at the time, and I probably even said it like. Bold choice to pick NVIDIA in October of 2023, after it had two straight quarters of AI, everything.

But here we are on we're recording this on Valentine's day. So we are caught, a few months after October and his mini portfolio here is up 28. 1% on average. And the S&P 500 over that same period of time is up 18 percent. 

[00:48:00] Now a few months does not make a successful portfolio, but he is handily beating the market with his pics. And I think it's interesting and I think we should chat about it. 

Jason Hall: Yeah, I love it. So first of all, this was, it was episode 73. This is when we rolled, when we announced this, I encourage you to go listen to that. That's when we, there's a third quarter review of the 2023 portfolio contest. So this was at the end of that when we discussed it.

I will say this first of all, my favorite thing about this contest or this portfolio is that it forced you to buy a stock that I believe constitutionally you're wired to have never bought. And that was Tesla

Jeff Santoro: Yes. Yeah, I probably if you go back and listen, there was probably more than one time where I said something like I will never own Tesla.

And here we are. 

Jason Hall: It was one of your Unportfolio picks. 

Jeff Santoro: It was right. And that and again, I picked it in that for two reasons. I actually did think it would have a down year and I was wrong, but I also don't ever want to own it. 

And now to my credit, it is the one stock in [00:49:00] this five stock portfolio that is down and it's down pretty substantially. 24%.

But as is often the case the loser in this portfolio is more than being carried by The winners. 

So let's quickly just real quick, I'll say what the companies are and their returns. So this is as of October 3rd, 23 through February 14th, 24. Applied Materials up 34% ASML up 61%, Nvidia up 64%, which if you, if I would never would've guessed that over this period of time. Old Dominion Freight Lines up 6% and then Tesla down 24%.

I just can't. It just goes to show you like how wild things can be. Like NVIDIA when he picked this was, I think you and I had recently trimmed our NVIDIA positions because we thought, let's take, let's take a little bit off the table here. There's no way this can keep going up. And it has. 

Jason Hall: NVIDIA continues to report better quarters and bigger guidance, right? Their book of orders continues to get bigger. 

Eventually the cycle for [00:50:00] demand for the GPUs for AI is going to soften, right? There's going to eventually, that investment cycle is going to take a break.

But man, it just is incredible how it just seems like the, it's this is maybe a super cycle that just takes a long time before companies pull back from this spend.

So that's one that I continue to watch with interest. 

And I will tell you a week or so ago I was very tempted. I haven't looked at the stock, but that day the stock was at its all time high. I don't know what it's done since then. I was very tempted to sell the remainder of my position. Because of just, I'm convinced that I'll get a better buyback price at some point this year.

But again, we spent the first 90 percent of the show talking about when you trust your gut and your intuition and when not to, and I've already said that I know that I am wired to not own these very large companies, right? I know that is a bias. That is a blind spot that I have. 

And I decided to just ride it out. Because I'm pretty convinced that 10 years from now, whether it's worth exactly the [00:51:00] same as it is today or even lower or goes up a bunch from here, it will be a massive return from when I bought it that even if it goes sideways for a decade will still be one hell of a total return.

And it's worth it for me just to continue to own what I own and not screw up a good thing. 

Jeff Santoro: Yeah. And history tells us, at least past history if you want to believe that it can stay the same moving forward, I guess that's everyone's decision. But companies like NVIDIA, because they're in a cyclical industry will give you better price points.

In fact, just a month or two or three, like I have to go back and look, but I remember before the AI thing hit, which I think was Q2 of 23, if I'm remembering correctly, before that earnings report you didn't have to go back very far to find a point where NVIDIA was, I don't know if it was near 52 week lows, but it was probably closer to an all time low than it was to or a 52 week low than it was to a 52 week high.

Like it was doing fine, but I had bought it prior to that. And I believe there was a time when [00:52:00] I, it was down for me, and it, yeah, and then 

Jason Hall: it just turned from late 2020. So really like October 21 was the peak of like the dot com 2. 0 is what I've been calling it. The stock was down basically 70 percent from there as recently as late 2022, right? And it took it two, a year and a half to fully recover from that price. 

So I believe that's what happened. Yeah, right. Took a long time. And then it went off like a rocket. 

Jeff Santoro: I was joking about the same thing. Like maybe I'll sell my NVIDIA. But I think for me, what I'd. Again, it's not a huge position for me. I've only owned it, I don't know, since 2020 or 2021 is probably when I first bought it. I, because it's not this enormous position in my portfolio, right, and I just don't have that much in individual stocks, I, for me, it's more about, I can't wait for that lower point.

So I can just buy more of it. Just buy more, right? Yeah. And I don't not, it's not like it's like 10% of my portfolio and I can't sleep at night. That kind of a thing. Yeah. It's not. So I'm in a position of just like watching get greener and greener in my portfolio and [00:53:00] then, I'll buy more later when I can.

Jason Hall: Yeah. I'm the same. And the one, I'll tell you this is the one that I really regret and that's ASML right? I've spent my entire career, since I've known about this company probably six or seven, seven years, I've really been paying attention to it. 

It's really been over the past five years that it's been circled somewhere on a list for me. It's like, I really need to own this one. I need to buy. I need to buy. And I just keep not buying because it looks expensive and I'm convinced somebody get a better price. 

And here we are, it's up 61%. Just the last couple of months. I'm just going to have to bite the bullet on ASML. 

I really am. 

Jeff Santoro: I'm that's one where I had a very early, just going back quickly to the beginning of the show, I had a very early kind of strong gut feeling about that as I was learning about it. Because as soon as I heard, you can't do semiconductors without this company and no one else does what they do. I was like, I don't see how this is not a winner.

And that was also before I was really paying a lot of attention to valuation. So I'm sure if I go back and look, I bought it. Historically high points and just didn't know what I was doing at the time, but it has worked because it's up in my portfolio as [00:54:00] well. Not just in this one since October.

Yeah, a lot of kind of a lot of mini lessons, many lessons here, the last one I'll mention and then we can wrap things up. 

Old Dominion Freight Lines is one that I've owned for a while, a very small position. And it's just always really expensive, like compared to almost all of its competitors, like it's never cheap.

Right. And I've not bought more of it for that reason. But here we are, even that's up 6 percent over the last couple of months. So who knows.

Jason Hall: Find the best company in an industry and probably start there. Right. Right. So that's certainly been the case for all the minute. All right, Jeff, I think we did it right.

Jeff Santoro: We absolutely did it. 

Jason Hall: This was fun. As always, I'd like to remind everybody, we love, man, do I love talking. Giving my opinion, giving my answers to these hard investing questions out there. But you, my dear listener, it's up to you to answer these questions for yourself. You can do it. I believe in you. All right, Jeff.

We'll see you next time, bud. 

Jeff Santoro: See you next time. 

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